SDE vs EBITDA multiples

searcher profile

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?

11
57
948
Replies
57
commentor profile
Reply by an intermediary
from Boise State University in 800 W Main St, Boise, ID 83702, USA
Hi Logan, I'm a business broker and business appraiser and wanted to provide my perspective. The main reason SDE is used to price and value small businesses is because in many cases that small business does not show an EBITDA. As you likely know, SDE is adjusted EBITDA plus adjusted compensation for one working owner. Many small business owners manage their businesses to diminish net profit (a key part of EBITDA). Thus SDE is a better way to determine the owner benefit stream.

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.
commentor profile
Reply by an intermediary
from Indiana University at Bloomington in Carmel, IN, USA
Shella is spot on. When you look at averages, as an example PeerComps, almost all industries, when you throw out a couple of the low and high outliers, the average SDE is 2.78 and the average EBITDA is###-###-#### There is a standard deviation of 25%+/- based upon all the soft factors (industry, location, lease, management team, growth, etc.). When you do the graph of both, the crossover point is around $600-700K, As the deal gets larger, owner's comp, as a % of the free cash flow, gets smaller so EBITDA is used. SDE also takes out the disagreement of what the owner's comp should be normalized. Right now it is a seller's market and multiples are inching higher.
commentor profile
+55 more replies.
Join the discussion