What Is the Most Important Number For Buyers

When doing a valuation for making a SBA 7a loan, the lender is going to utilize methods that analysis income. The most common evaluation methods are 1) Multiple of Seller's Discretionary Earning (SDE), Discounted Future Cash Flow, Capitalization of Earnings (EBITDA), and Excess Earnings Method. While I can run an spreadsheet model for all these methods for individuals selling or buying a business in Florida, I find that most businesses are valued and sell within the range of the values generated utilizing the Capitalization of Earning (EDITDA) and Multiple of Seller's Discretionary Earning (SDE) methods.

The reasons that these two methods provide the optimum valuation and selling range are:

• They both evaluate cash flowing through the business

• They provide the lender and buyer with enough information to know if the business generates cash to pay down debt, pay the buyer a salary after closing, and to determine ROI.

Which of these two methods is most useful? It depends.

Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) is the figure that offers a fairly reliable estimate of the kind of cash a business generates to pay down debt, pay taxes and offer a return to investors.

Sellers' Discretionary Earning (SDE) or Seller's Discretionary Cash Flow (SDCF), on the other hand, is a figure used more often in smaller businesses because it accounts for the salary that the company's owner pays himself, along with any other benefits or perks like a company car or life insurance policy.

In other words, SDE = EBITDA + owner's salary + perks and benefits.

For a complimentary consultation:
Contact Cecil Williams (cecil@bizbrokerflorida.com) or call  at 888-925-5055 ext.206.  Visit my personal website to search for business for sale in Florida www.bizbrokerflorida.com  Also, visit our Florida Business Exchange website at www.fbxbrokers.com