Business broker terms

Business Brokerage Jargon that is important when selling a business:

SDE vs. EBITDA

 

In the business brokerage industry there are two terms that are important for any business owner that is looking to sell their business or a business buyer that wants to actually purchase that business… to know. SDE and EBITDA. Business brokers, including the seasoned professionals at Sigma Mergers and Acquisitions, frequently use these acronyms, and understanding their nuances can be the key to navigating the minefield of buying and selling businesses. So, let’s break down SDE and EBITDA, making them as understandable when selling a business.

 

First up, we have SDE, which stands for Seller’s Discretionary Earnings. Picture this as the business’s financial report card, highlighting the owner’s take-home pay and additional perks that might not be visible on the standard profit and loss statement (P&L). SDE takes into account the owner’s salary, personal expenses, and any discretionary spending that could be adjusted under new management. It’s like peeling back the layers of a financial onion to reveal the true earnings potential of the business. These “discretionary”  expenses are often called “addbacks

Typically in Mid-market deals M&A firms use the term EBITDA – Earnings Before Interest, Taxes, Depreciation, and Amortization. This term might sound like a mouthful, but fear not; it’s simpler than it seems. EBITDA zooms in on the operational efficiency of a business by excluding non-operating expenses like interest, taxes, and depreciation. It’s like focusing on the core business performance without the distractions of financial nuances that don’t directly impact day-to-day operations.

Now, let’s imagine you’re eyeing a business for sale, and the broker mentions SDE. This is your cue to pay attention to the owner’s financial perks and discretionary spending that might not be immediately apparent in the financial documents. SDE provides a comprehensive picture of the financial health of the business, accounting for the owner’s lifestyle and spending choices. On the flip side, if EBITDA takes the spotlight in a conversation with your M&A Firm or business broker, it’s time to zero in on the core operational strength of the business. EBITDA acts like a magnifying glass, allowing you to see the true earnings potential stripped of extraneous financial elements. It’s a metric that paints a clearer picture of the business’s ability to generate profit based on its day-to-day operations. To put it simply, while SDE considers the owner’s financial habits and perks, EBITDA shines a light on the core profitability of the business itself. Both metrics serve as invaluable tools for potential buyers, helping them make informed decisions about the true value and potential of a business.

EBITDA PIC

Armed with this knowledge, both business sellers and business buyers can go through negotiations with confidence, ensuring that they grasp the full financial story of the business they are considering. So, the next time SDE and EBITDA enter the conversation, don’t let them be the intimidating – think of them as your guides to unraveling the financial picture of the business.

Business brokers may use various terms interchangeably with Seller’s Discretionary Earnings (SDE) to describe a business’s financial performance. These terms help provide a comprehensive view of the owner’s benefit from the operation.

Basically they are different terms for the same topic. Here are some alternative terms that a business broker might use:

 

  1. Seller’s Discretionary Cash Flow (SDCF): This term emphasizes the cash flow aspect of the owner’s discretionary earnings, highlighting the funds available for the owner’s benefit.

 

  1. Owner’s Cash Flow (OCF): Similar to SDC, Owner’s Cash Flow reflects the cash available to the owner after covering essential business expenses.

 

  1. Adjusted Cash Flow: This term underscores the adjustments made to the cash flow figure, considering discretionary expenses and owner benefits.

 

  1. Adjusted Earnings: Business brokers might use this term to convey that the earnings have been adjusted to reflect the owner’s discretionary expenses.

 

  1. Owner’s Benefit: This term is more straightforward, indicating the financial benefit derived by the owner from the business.

 

  1. Pre-Tax Owner’s Earnings: Highlighting that the earnings are before taxes and represent what the owner could potentially take home.

 

  1. Normalized Earnings: Normalized Earnings suggest that the figures have been adjusted to portray a more typical or sustainable financial performance.

 

  1. Proprietor’s Earnings: This term emphasizes that the earnings belong to the proprietor or owner of the business

 

  1. CFO (Cash Flow to Owner): A concise term indicating the cash flow available to the owner.

 

  1. Owner’s Profit: This straightforward term implies that the earnings represent the profit generated for the owner.

 

  1. Personal Income from Business: Describing the earnings as the personal income derived by the owner from the business.

 

  1. Discretionary Income: Emphasizing that the income is discretionary and subject to the owner’s choices.

Conclusion

Each of these terms aims to convey the concept of SDE but may be used in different contexts based on the preferences of business brokers or the industry norms. The key is to recognize that these terms allude to the financial benefit that the business provides to its owner, accounting for discretionary expenses and perks. Understanding the difference between terms like SDE and EBITDA, along with their interchangeable counterparts, is essential for both buyers and sellers. Whether it’s called Seller’s Discretionary Earnings, Owner’s Cash Flow, or Adjusted Earnings, these terms serve as a key to unravel the genuine financial story of a business.

Buyers benefit by using these terms as a tool to decode the real profit potential lurking beneath the layers of financial statements. By grasping the discretionary expenses embedded in SDE, purchasers gain insights into the actual earning capacity of a business, allowing them to make well-informed decisions.

For sellers, these terms become a means to showcase the tangible value of their business beyond conventional profit and loss figures. Understanding the intricacies of SDE empowers sellers to highlight the genuine benefits a new owner can enjoy. Business brokers play a crucial role in facilitating this financial conversation. Employing these terms helps brokers articulate the authentic profitability of a business, fostering transparency and trust between buyers and sellers. In the negotiation process, these terms act as a shared language, ensuring both parties enter a deal with confidence and a clear understanding of the business’s financial profitability.

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Scot Cockroft Business Broker
Hi, I’m Scot Cockroft.

When I founded Sigma Mergers and Acquisitions back in 2003, I had sold my business the year prior.

Now, that can sound good, but let me tell you, back in 2003, it was not easy to sell a business. Not that I’m saying in modern day times it’s easy to sell a business, but back then I interviewed broker after broker after broker, and no one was interested in actually seeing the value that my business brought to the table.

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Sigma is a the leading business broker in with Corporate offices in Dallas/Fort Worth with roots from 1984. Over 600 businesses sold in Dallas, Fort Worth, Texas, Oklahoma and across the South. Sigma provides full business brokerage services with NO upfront fees. We provide Market approach business valuations for business sales. Sigma is passionate about helping business owners achieve their goal of financial security. Contact us today for a free no obligation business valuation. We are here to help you achieve your goals.

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