After 30+ transactions, we decided to add an expense to the SDE of $300,000 if the owner is still active in the building.
You can replace them for possibly $150,000, but the kind of mentality it takes when a problem comes up and the headaches if someone leaves the team or something urgent happens is at least another $150,000 a year in mental capacity for ownership.
When do we apply this rule?
- If the owner is still the GM
- If the general manager is related to the owner
- If the general manager has been in the business for less than 2 full fiscal years
- If family members are working in the business (most likely need to be replaced)
- If the passive owner has been doing sales and going to conferences
The business is doing $5MM in revenue and $700k SDE? Not worth $2MM, its worth $1MM. The business is doing $8MM and $1MM SDE but the owner holds most relationships and he has been doing the sales himself? Business is not worth $3MM, it's worth $1.5MM.
This is why most businesses under $500,000 SDE are worth less than $500K and we would never buy them for more than that.
What do you think about this?
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