SDE addbacks (Owner salaries)

by a searcher from The University of Chicago - Booth School of Business

3 months ago

Hi all,

Reaching out to tap into the wisdom of this community. How the owner salary should be treated for SDE calculation, when the owner is 100% involved in the deal?

In the last 30 days, 3 deals i looked at, had SDE calculations where the owner(s) salary was added back, although the owners are 100% involved in the business, but no  market wages for equivalent positions were considered to replace those positions. All these were with business brokers (not that sophisticated in my opinion), and when I mentioned that's not the right way to calculate SDE, you need to consider market wages to replace those positions (even if smaller amounts), they become defensive.

What should I do, is it even worth mentioning this? Why would they do this? What am I missing here?

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63 comments

searcher from Columbia University

Pretty normal in this space. You'll need to readjust the "SDE" to "Adjusted EBITDA"... meaning, you'll need to incorporate a salary for yourself + any new operating expenses that the business will need under your ownership. Take that number, divide it by the Purchase Price... and that's the true Purchase Multiple you'll be paying.

1 week ago | like reply | 1 like

investor from University of Southern California - Marshall School of Business

One thing I've seen a lot when moving from SDE to EBITDA by adding back a "reasonable operator's salary" is that the salary is far from reasonable. If someone can find me a solid, reliable GM to run a $1M EBITDA/SDE s-show of a business for $100k, I'll take 3 of them!

1 week ago | like reply | 0 likes

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