SDE or EBITDA Which do I use?

November 29, 2023

by a professional from Bishop's University in Moncton, NB, Canada

***New Video Alert!

Should you be looking at SDE or EBITDA?

When do we use each and what is the difference?

It’s important.

The new video is here: https://youtu.be/pB1ZXBuilEs

Cheers

See you over on YouTube

David C Barnett

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Replies

Reply by an intermediary
from Clemson University in Raleigh, NC, USA

I do not agree that the buyer type determines the correct valuation methodology. This conflates the buyers discretionary choice in operations (which determines free cash flow) and business valuation. Put another way, a business is worth what a business is worth. If a buyer is, for example, strategic and can immediately cross-sell and upsell to the target's client base, it does not make the target more valuable (why should a buyer pay more for value THEY are bringing to the transaction?). If a buyer elects to hire a manager and be absentee, it does not make the business less valuable - it simply impacts free cash flow as a result of the buyer's discretionary operational decisions. From a cash flow perspective the target may be more or less attractive to the buyer, but the intrinsic value of the target is static. I've found that the SDE/EBITDA cross-over point is shockingly low. If you take the midpoint multiple of SDE at 2.5 and the midpoint multiple of 5x EBITDA with a $125,000 executive load, the target valuation is equal at just $250,000 SDE and $125,000 EBITDA (equating to $625,000 in enterprise value). This means using SDE in larger transactions or EBITDA in smaller transactions will under value the target.

Reply by a professional
from Western Washington University in Spokane, WA, USA

Well presented - thank you. Concur with your comment that many brokers in the main street / LMM are not well versed in critical aspects of business valuation which does a disservice to all.

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