Calculating Seller's Participation into Valuation

April 02, 2025
by a searcher from Williams College in Cleveland, OH, USA
Hello Searchfunder Community,
I am curious as to how fellow searchers are valuing small manufacturing businesses when (1) the seller is a full-time, active participant in the company and (2) the business is sub $3M revenue. I'm getting a lot of brokers that propose EBITDA numbers with the seller's salary as an "add back" while proposing a sale price with multiples in the 4-5x range. From my limited perspective, I thought brokers and other professional valuators would include a seller's salary as a rightful expense (as long as it was market rate), that would not contribute to EBITDA. Are brokers damaging sellers' expectations of a valid offer from buyers or am I just too new to this world and need to up my offer amounts? Would welcome thoughts!
in Philadelphia, PA, USA
1. Understand that a common multiple is###-###-#### SDE including owner salary, and addbacks
2. Seeing this multiple, you should have as "available" cash flow the SDE value which you could use to pay youself, a manager (if applicable), and debt. Hence, it's very relevant to understand if you're looking to operate. Knowing also that, if you're looking for a business with an operator instead, it could likely be that it's a better structured business, which would probably not be under $5M revenue, and will likely have a higher price multiple than expected, because, that provides A LOT of value.
3. Check the debt service coverage ratio (DSCR) of your SDE vs debt, and understand if it's something that works for you, according to the loan you would get, and to the payment you wish to receive.
4. During the initial period, you can only do a surface quick review of addbacks, but you got to pretty much trust it unless it's evidently false numbers, in which case, you would of course walk away. The real moment when you would potentially review the addbacks with high accuracy, is during operational, and financial due diligence, with the help of an expert accountant. Here you can assert your DSCR assumptions and see if you would really be comfortable with it.
That's my 2 cents, I'm far far from being an expert, so, don't trust this blindly, rather analyze it and see if it makes sense for you
Would also love to hear different/alternate thoughts from anyone
from Rochester Institute of Technology in Toronto, ON, Canada