I would like to understand how the owner’s compensation “add back” from the valuation indicative of a 100% interest in the business should be handled if this valuation were to be used to establish a price for a minority interest in the business instead.
Given that the current owners would continue under their current salary arrangement in perpetuity even after my acquisition of a minority interest, I feel the calculation of the SDE valuation should not include an "owner's compensation" adjustment. In other words, the owner's compensation "add back" should be removed to calculate SDE. Thoughts?
SDE means "Seller's Discretionary Earnings". Therefore, if your valuation is using a multiple of SDE, then that is where you are at.
I agree with others here that you should use an EBITDA multiple for this evaluation, and you can explain that this method is used because their salaries will not contribute to your or any other shareholder's dividends, withdrawals, or distributions.