Because though your mind is great at creating stuff, it’s terrible at tracking it. And yet there’s a good chance you’re tracking tons of stuff in your head right now. Stuff that drains your energy and clogs your creativity. Stuff that makes it hard to stay afloat day-to-day, let alone find the time to get the information to us that could create the beginning of the next new chapter in your life! I’ve listed below 6 reasons to put Northstar Advisory at the top of your to do list. It won’t be like going to the dentist, I promise.
Aim for done over perfect. We do not need your 2022 business tax returns to get started.
To get started, you only need your income statement and balance sheet for the past three years. This information will provide an excellent starting point to establish a beginning value for your business and begin the discussion.
It’s important to know what your business is worth, regardless of whether you decide to sell it. No business is perfect, and every business can improve. Sometimes the smallest improvements yield the greatest results. We will help you pinpoint all of them.
Buyers pay for the past, consider the present, but will buy for the future. Past financials will help determine the purchase price, but they do NOT guarantee what the business will look like in the future. We help you evaluate your business for what it can expect to provide a future buyer. We can help you identify the hidden value in your business.
Identify your business “uniqueness”- You MUST be able to explain it in simple terms to potential buyers and with great enthusiasm. We help coach you through the selling process.
We can’t do a darn thing to help you until we get your information. Our valuation services are complementary to our clients planning to exit within the next twelve or twenty-four months.
How Small Businesses Are Valued
Based on Seller’s Discretionary Earnings (SDE)
Public companies and
middle market businesses are valued as a multiple of EBITDA – Earnings Before Interest, Taxes, Depreciation and Amortization.
However, smaller businesses are valued as a multiple of Seller’s Discretionary
Earnings (SDE), which can be defined as EBITDA + Owner’s Compensation.
Therefore, SDE is typically the net income (or net loss) on the company tax
return + interest expense + depreciation expense + amortization expense + the
current owner’s salary + owner perks.
Because it is the foundation
of business valuation for small businesses, SDE is an important concept to
understand. SDE is typically the net income (or net loss) on the
company tax return + interest expense + depreciation expense + amortization
expense + the current owner’s salary + owner perks.
Seller’s Discretionary Earnings
To arrive at SDE, the seller’s financial
statements are “normalized” (alternate terminology includes:
“recast” or “stabilized”). The typical “SDE
Normalization” presents the seller’s regular income statement and then
shows each normalizing adjustment (with an explanation) to arrive at the
Earnings adjustments resulting from personal and/or discretionary
In addition to the adjustments of EBITDA +
Owner’s Salary, other adjustments may be necessary. For instance, it’s no
surprise that many small business owners run a lot of personal expenses through
the business that have nothing to with operating the business. If
properly documented, those personal and/or discretionary expenditures may be
added back to SDE.
Other types of Seller’s
Discretionary Earnings adjustments
Many small business
owners personally own the real estate the business occupies. If the
business is overpaying or underpaying facility rent, the amount needs to be
adjusted up or down to reflect the rent a prospective buyer of the business
would expect to pay.
Occasionally there are
non-recurring expenses, such as an extraordinary legal bill due to a lawsuit,
that may be added back to cash flow.
There can also be
non-recurring income (i.e. sale of a fixed asset at a large gain).
Some businesses employ
multiple family members who may receive above-market compensation. The
above-market portion of their salaries can be added back to the extent there is
sufficient expense remaining to enable a prospective buyer to replace those family
members at a competitive market rate (or adjust their salaries if they stay on
These are some of the
common adjustments, but there may be justification for others.
Small business valuations are
based on multiples of Seller’s Discretionary Earnings
When it comes to valuing a small business
(under $3,000,000 in value), SDE is the common denominator to which a multiple
is then applied.
The multiples are driven by a range of
financial factors including: 1) financing formulas; 2) the buyer’s need to have
a reasonable return on investment after paying debt service on the acquisition;
and 3) the buyer’s need to receive reasonable compensation for the time and
effort required to run the newly acquired business. There are numerous
other factors, including the industry, that can also affect the selection of an
But one of the primary factors is the level of
SDE itself. For financial reasons, buyers are willing to pay a higher
multiple for higher SDE. The following is representative of the range of
multiples at various “cash flow” (SDE) levels:
1.0 – 1.25
$50,000 – $62,500
1.1 – 1.8
$82,500 – $135,000
2.0 – 2.7
$200,000 – $270,000
2.5 – 3.0
$500,000 – $600,000
3.0 – 4.0
$1,500,000 – $2,000,000
3.25 – 4.25
$3,250,000 – $4,250,000
CAUTION: The above
multiples do not apply to all industries. For instance, the construction
industry would typically have lower multiples than displayed above.
Earnings is a very important concept to understand
Because it is the foundation of business
valuation for small businesses, Seller’s Discretionary Earnings (SDE) is an important
concept to understand. Having an SDE below $100,000 is a major obstacle
to a successful sale of a business (but not impossible).
Wouldn’t doing business be so much easier if CEOs could see into the future? Unfortunately the closest a business owner or leader will ever come to having a crystal ball is establishing a strong, fact-based financial model. Not only do these models provide CEO’s with the best possible view into their financial future, they are also imperative when attempting to secure additional capital. No banker, loan officer or investor will sit down and have a meaningful discussion with a business owner who doesn’t have a financial plan.
A financial model is a set of assumptions about future business conditions that drive projections of a company’s revenue, earnings, cash flows and balance sheet accounts. In practice, we use financial model in a spreadsheet form (usually in Microsoft’s Excel software) to forecast a company’s future financial performance.