SDE vs EBITDA multiples
June 01, 2021
by a searcher from Texas A&M University - Texarkana in Dallas, TX, USA
SDE multiples seem to be common for small businesses I've been looking at but I still think it's ridiculous and just a way for the seller to overvalue his/her business. EBITDA multiples of 3-4 seem normal right now but SDE owners are trying to use the same 3-4 range.
Is anyone out there paying 3-4X SDE? Or any experience making offers based on EBITDA multiples when the sellers has an asking price as a SDE multiple?
from Boise State University in 800 W Main St, Boise, ID 83702, USA
Also, the databases used to value small businesses track SDE rather than EBITDA (because it isn't there). The following databases ONLY track SDE: Bizcomps, ValuSource, Peercomps. DealStats tracks both both SDE and EBITDA. However, in my observation, in many cases, a business with an SDE amount shows nothing for EBITDA. The main reason for using SDE is because the owner is an integral part of the business and in many cases, the buyer is essentially "buying a job".
Also, from my observation, depending upon the company's earnings, and its comparison to similar comparables in one of the data bases, the SDE range may be between 2.00 to 4:00 times. It just depends. I've sold a business that had a 7.50 times SDE and others with only a 2.00 SDE. The reason is due to the quality of earnings of the company and the likelihood of that continuing into the future. Further, if there is an EBITDA figure to use, the multiple will be larger because, EBITDA is net of owner's compensation while SDE "adds back" owner compensation. In theory, whether one uses SDE or EBITDA for one specific company, the calculation should yield a similar value. For example: if SDE is $500,000 and the selected SDE multiple is 3, then the value is $1,500,000. Similarly, an EBITDA multiple for the same company could be###-###-#### with an assumed EBITDA of $300,###-###-#### Either way you get to the same value. If the two ways of determining the value don't come to a similar range, there is an error in the calculation or the multiple selection. In other words, all things being equal, you should get the same answer. I hope this helps. Reach out to me directly if you'd like to discuss further.
from Wake Forest University in Winston-Salem, NC, USA
Likewise, Adjusted EBITDA is not cash flow, but rather the amount of cash the seller has after paying a normalized owner compensation or a full-blown GM that can run the business for an absentee owner and before debt service, capex, and changes in working capital and after normalizing adjustments for market rent, one-time, non-recurring expenses and purely discretionary expenses for owner's personal benefit.
As several mention, they are not transferable, nor interchangeable -- they are just two adjacent points on the valuation continuum. In some cases, usually smaller, owner-operator businesses without professional management teams, SDE will likely be more relevant. For larger, non-owner operator companies, with management teams, EBITDA will likely be more relevant. As mentioned above, just don't mix and match multiples from one with dollars from the other. Also, either (if the correlation is high) can be used as part of your valuation, but should not the only input to your valuation.