Question on revenue and SDE discrepancy

February 10, 2022
by a searcher from Georgia State University in Boston, MA, USA
Looking at a company and the revenue hasn’t varied much in the past 3 years but the SDE has almost doubled. How is this possible? Should this effect the SDE multiple, currently they want a 3.5 SDE multiple based off the past year of high SDE but with that variance in SDE over the 3 years I feel that’s a pretty high.
from University of Pennsylvania in Charlotte, NC, USA
I would add that you should be analyzing cash flow, not just the income statement.
But first, just ask the seller and/or broker hard questions and require supporting data from them.A reasonable seller would expect to have to explain the unusual margin expansion, including, critically, a discussion of how sustainable it is.Has seller provided a projection along with discussion and analysis of same?If they cannot provide a satisfactory explanation that is supported by verifiable information or if they seem reluctant, evasive or offended by your standard due diligence inquiries, it's obviously a big red flag.
It's impossible to discuss an appropriate valuation until you're further down the road with your diligence but good luck with pursuing this opportunity.
from Arizona State University in Long Beach, CA, USA
- Was there any reduction in staff?It's possible that they became more efficient. Was the staff member a family member? If so, it's possible that a spouse who was taking a salary before stopped taking a salary, but may still be doing work for the business - In which case, you'll need to account for market value replacement salary
- Was there a significant cost reduction in inventory, or some other service that the company procures?- This seems unlikely in our high inflation environment, but depending on the business type, it's possible ... they may have negotiated a discount....or could've been getting ripped off by vendors in the past
- Have they reduced spending in maintenance/repairs/upgrades etc?It's possible that someone thinking of selling the business may be only spending the bare minimum, and there could be some deferred maintenance costs that a Buyer will incur in the near future.
- Did they move to a smaller location with lower rent?