Yesterday a valuation client asked if her EBITDA value given by CPA would be the same as what I calculate.  Frankly I just don’t know and really don’t want to know the CPA’s calculation until AFTER mine is completed.

While this is yet to be learned about her company, most small companies, let’s say with several million or less in revenue, with single owners operating the business are not usually calculated on an EBITDA basis, instead they are calculated based on seller’s discretionary earnings (SDE).

Definitions first please:

EBITDA – this means earnings before spending money on interest, taxes or expensing depreciation, and amortization.  It is a calculation based profit and loss statements.  Usually considered for larger companies as general manager (by whatever title) are in place and are to remain, this in addition to the owner who may be passive.  There may be corrections to the unusual items, such as paying a general manager over/under market wage and benefits or any unusual items that may not repeat.

SDE – this calculation is also made from the profit and loss statement.  In smaller companies the owner is often operating the business too and each has her own opinion as to how to spend business-generated money for their benefit, think owner wages, retirement funds, health insurance, dog grooming bills, non-business car expenses.   Thus, this calculation is done considering everything in the expenses that accrues to the current owner.  Interest, depreciation, amortization are not included in expenses.  There may be corrections to the unusual items, such as paying, perhaps, family member paid over or under market wage and benefits or any unusual items that may not repeat.

When valuing the non-owner-operated business with EBITDA, the multiple of EBITDA is more likely 3 or more sometimes as high as 8!

When valuing the business operated by the owner, using SDE, it would be rare for the multiple to be as high as 3, yet very possibly on a higher $$ calculated than in EBITDA.

Often the result for a similarly profitable company, whether EBITDA or SDE is close.

Are there exceptions?  Of course.

Now you might ask, how does one come to the proper multiple?  Watch for that in another blog.

Note:  When I do valuations and the business sells, my calculations are routinely within a hare’s breath of the bank-hired appraiser calculation.


Valuation Samples


Pd Bank Hired Appraiser Other Broker
#1 $700,000 $699,000 n/a
#2 $515,000 (Buyer’s Broker) $700,000 $410,000
#3 $1,607,000 $1,613,518 n/a
#4 $2,000,000 From seller ‘a tad higher’ n/a