EBITDA/SDE multiple of home service business

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December 29, 2024

by a searcher from Georgia Institute of Technology in Atlanta, GA, USA

Hi, I own an existing trade business and paid 3x EBITDA because it primarily had COD (credit card, same day) revenue. I am exploring another acquisition in which the business is mostly project based (e.g. net###-###-#### day terms). The annual EBITA and SDE differential is quite significant when using cash basis accounting versus accrual accounting. On a cash basis, the company did $400,000 in EBITDA but on an accrual basis, the company did $700,000 in EBITDA. Should I pay a multiple of $400K or $700K?

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Reply by a searcher
from Northwestern University in Tampa, FL, USA
As a middle ground, use 700k for the calculation and reduce the valuation by the amount of working capital needed to fund a 60 day cash cycle
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Reply by a searcher
from University of Pennsylvania in New York, NY, USA
I agree with ^redacted‌'s suggestion. Two other things to look into to inform your offer. One way "cash" EBITDA would significantly lag "accrual" EBITDA is if the business is growing rapidly, to which you need to diligence whether that growth is sustainable or transient. The other way is if customers are slow-paying their invoices. In an extreme scenario, a seller may invoice low-quality customers just to book accrual revenue. You should ask for an A/R aging report (one current and another say 3 months ago) to see the evolution of payment -- as well as evaluate the company's DSO over time.
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