Hi all,
Reaching out to tap into the wisdom of this community. How the owner salary should be treated for SDE calculation, when the owner is 100% involved in the deal?
In the last 30 days, 3 deals i looked at, had SDE calculations where the owner(s) salary was added back, although the owners are 100% involved in the business, but no market wages for equivalent positions were considered to replace those positions. All these were with business brokers (not that sophisticated in my opinion), and when I mentioned that's not the right way to calculate SDE, you need to consider market wages to replace those positions (even if smaller amounts), they become defensive.
What should I do, is it even worth mentioning this? Why would they do this? What am I missing here?
SDE addbacks (Owner salaries)
by a searcher from The University of Chicago - Booth School of Business
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One full-time equivalent comp and benefits must be left in for EBITDA calculations.
You cannot impute a full-time equivalent for the owner unless you are willing to pay a higher EBITDA multiple.
I generally use SDE when there is less than around $750,000 of SDE and EBITDA when there is more than around $750,000 of SDE. In this range, the two approaches are pretty close.
Anyone who tries to argue that the sellers fair market rate is not an SDE addback will be discarded as a viable buyer.