Financing the Sale of Your Business – Part II

Last time we discussed the fact that since the Great Recession, commercial banks have become asset-based lenders. This is a negative development to the business seller since most business sales require a buyer to pay a premium over asset value. Sellers correctly expect to be compensated in the purchase price for goodwill, also referred to as enterprise value and unflatteringly as blue sky or air ball.

Measuring the value of your business with EBITDA and SDE

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is an accounting term used to measure the profitability of a business before expenses for interest, taxes, depreciation and amortization. I am often asked by business owners, “What multiple of EBITDA should I use to determine how much my business is worth?” If your business is an owner-operator enterprise, the answer is generally, “EBITDA should not be used in the valuation of your business; SDE (seller’s discretionary earnings) is the figure that matters.”