VR Business Brokers | Mergers and Acquisitions
1) SDE, or seller's discretionary earnings, is a direct measurement of the true bottom-line benefit of owning a small business. SDE includes the owner's salary or take-home compensation.2) EBITDA, or earnings before interest, taxes, depreciation and amortization, differs from SDE in one key area: it includes compensation for management. Discount or capitalization rate can vary greatly by the type of prospective purchaser and the overall risk of the continuity of the income stream. Depending on the buyer and the business, some potential areas of risk can be the size of the company, competitive forces, barriers to entry, growth rates, lack of management, etc. As a broad-brush example of risk, an investor investing in a portfolio of stocks representing the entire stock market may believe that an 8% rate of return is adequate given the enormous diversification in industry and given that these publicly held companies have top quality management. On the other hand, a potential buyer of a beauty salon may seek a 50% rate of return given the large number of competitors, high employee turnover, low barrier to entry, and the necessity of constant supervision.
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