After 30+ transactions, we decided to add an expense to the SDE of $300,000 if the owner is still active in the building.

You can replace them for possibly $150,000, but the kind of mentality it takes when a problem comes up and the headaches if someone leaves the team or something urgent happens is at least another $150,000 a year in mental capacity for ownership.

When do we apply this rule?

  1. If the owner is still the GM
  2. If the general manager is related to the owner
  3. If the general manager has been in the business for less than 2 full fiscal years
  4. If family members are working in the business (most likely need to be replaced)
  5. If the passive owner has been doing sales and going to conferences

The business is doing $5MM in revenue and $700k SDE? Not worth $2MM, its worth $1MM. The business is doing $8MM and $1MM SDE but the owner holds most relationships and he has been doing the sales himself? Business is not worth $3MM, it's worth $1.5MM.

This is why most businesses under $500,000 SDE are worth less than $500K and we would never buy them for more than that.

What do you think about this?