Partial Year Expenses When Calculating SDE

April 23, 2020

by a searcher from University of Colorado at Boulder in New York, NY, USA

Hello. The company my partner and I are looking at hired an employee in September of last year. In the income statement for 2019, her salary is rightfully only 25% of the go-forward cost of having her on staff in###-###-#### Assuming that we want to keep the employee in her current position and at her current pay, how should we think about the valuation of the company?

For example, let's assume her salary is $50,000 per year. Should we decrease the previous year's SDE by $37,500 to account for the fact that our realized SDE will actually be lower by that amount (assuming no other growth) in 2020? Does the same logic apply to other expenses that started mid-year and will be continuing expenses moving forward?

Reply by an intermediary
from Indiana University at Bloomington in Carmel, IN, USA

I will take a little of the opposite view for consideration. 1st you need to see if this person took the place of someone who left the company earlier in the year. 2nd Why was this person hired, was business increasing and more capacity was required? Is it still needed? 3rd I will give the owner some credit to keep business moving forward, too many business owners who are thinking about sell don't expand and make due with what they have. 4th The seller has eaten the expense of the recruitment and training costs for you. Just a different perspective, can't make a call without more information.

Reply by a professional
from Villanova University in New York, NY, USA

Ryan, you'll want to normalize the earnings of the firm to determine run-rate SDE. So you'll want to do this for new expenses as well as expenses that may have ceased. I'd be happy to talk to you further about it if you'd like. I do financial due diligence / quality of earnings so I see this type of thing on a regular basis. My email is redacted Hope to speak with you. -Dave

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