Seller’s Discretionary Earnings in Florida
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The most common method of business valuation is based on Seller's Discretionary Earnings (SDE). This cash flow metric is important for buyers to know before purchasing a small business. Most small business buyers in Florida are hoping for a return on investment when they purchase a company. The best way to determine this return is through seller's discretionary earnings, which allows buyers to compare companies in order to accurately valuate them.
Quorum Business Advisors are dedicated to assisting clients with the purchase or sale of a business. We’ll measure the cash flow of a business and calculate SDE so we can help you get an accurate valuation of a business. We specialize in helping small businesses in Florida and make the business of buying and selling easy.
What Is Seller's Discretionary Earnings?
Seller's discretionary earnings (SDE) is an alternative to earning before interest, taxes, depreciation and amortization (EBITDA) that attempts to standardize the cash flow of a business so it can be easily compared. It includes pretax and pre-interest profit, non-cash expenses, one owner's benefits, and one-time events.
It is important to add back certain items that are not strictly necessary for the business, such as personal meals for the owner, personal vehicular expenses, and owner life and health insurance. Adding back these expenses can help make the SDE more realistic and accurate.
Using SDE to determine the value of a Florida small business is useful because it takes into account all the costs associated with running the business. This is in contrast to other methods that only take into account the gross profit of the business without the added expense of salaries and benefits for the owners. Quorum Business Advisors is an expert brokerage firm dedicated to providing local Florida small businesses with valuations, confidential sales and acquisitions, and more.
Components of Seller's Discretionary Earnings
As the name implies, SDE includes earnings from a business before things like taxes and interest. It is a similar number to EBITDA, which is often used in merger and acquisition valuations. To calculate SDE, a Florida business owner takes net profit and adds back non-cash expenses such as one-time investments, one owner’s salary and benefits, and any other items that aren’t related to the business. The goal is to find a number that gives buyers an accurate picture of the company’s financial health.
If more than one owner works in the business, the salary and benefits for the additional owners are adjusted to reflect current market rates for a full-time employee doing the same job. Using these “add backs” helps prevent buyers from being overcharged for the company.
Benefits of Seller's Discretionary Earnings
As a less formal business valuation metric, seller's discretionary earnings is a cash-flow based estimate of the total financial benefit a full time owner derives from a small business on an annual basis. It is often referred to as "owner benefit," "recast earnings" or "normalized earnings."
Many first time buyers coming out of corporate America focus on SDE values when looking at small businesses for sale. They are looking to replace the income they will leave behind when leaving their previous employer. SDE calculations are often more accurate than P&L statements since it takes into account the personal expenses of a business's owner, such as their salary, trips, and parties, that would not be required if they were not owners. This allows a buyer to compare similar Florida small businesses on a consistent basis.
How Quorum Business Advisors Can Help Your Business
Whether you are ready to exit your business or are looking for an appraisal of its current worth Quorum Business Advisors can provide valuable assistance. You've invested much into your business, so let an experienced, unbiased advisor take care of the rest.
Seller's discretionary earnings is the cash flow measure used by Quorum Business Advisors’ business brokers to value Florida small businesses. Businesses may sell in the range of 2-5 times SDE. The exact multiple can vary depending on such factors as Industry, enterprise size, financial trends, quality of staff and customer concentration. Having the right advisor on your side can ensure you receive a fair market price for your business.
Quorum Business Advisors for Seller's Discretionary Earnings Services in Florida
Navigating your Florida small business’s path to profitability is a complex task, but there are trusted business brokers who can help you value your small business. Quorum Business Advisors will provide a valuation on your small business using SDE to measure the total financial benefit of your business. We’re dedicated to assisting our Florida area small business owners to determine fair market value of their businesses.
Calculating SDE can help you understand the true profit of your business and compare it to the profits of other comparable businesses that have sold in the past. This comparison is a key step in understanding the value of your Florida small business and can help you determine what steps to take to maximize its potential. When you’re ready to get started, contact Quorum Business Advisors for your small business consultation today.
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