SDE or EBITDA vs Reinvestment

searcher profile

June 18, 2022

by a searcher from The University of Michigan - Stephen M. Ross School of Business in Grand Rapids, MI, USA

What is some advice for thinking about SDE or EBITDA along with Owner Compensation when evaluating a Search, especially in a smaller acquisition? How much should you reserve for reinvestment in the business? With <$2M EBITDA sized opportunities, what is your best advice on distributions to investors and self?

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commentor profile
Reply by an intermediary
from The University of Chicago in Chicago, IL, USA
1) Amount of reinvestment can be estimated by studying past history and your own growth objectives.
2) I have not seen anyone "reserving" for reinvestment unless CapX is every few years or it is a hotel type investment.
3) Distribution to investors and common is driven by leverage and type of capital structure. If you have high leverage, you may not have material cash left over for distribution. Also, lenders, very likely, will restrict distribution. Preferred dividend to investors will be ok if senior lenders are ok with it.
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Reply by a professional
from University of Southern California in North Palm Beach, FL, USA
Warren Buffett says, “People who use EBITDA are either trying to con you or they’re conning themselves.” Charlie Munger, Buffett’s right-hand man, goes even further: “I think that, every time you see the word EBITDA, you should substitute the word ‘bullshit’" Strong words from some of the most successful businessmen on the planet.
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