When it comes to assessing the profitability of your business, you’ve probably come across two important measures: Seller Discretionary Earnings (SDE) and Normalized EBITDA. These metrics play a crucial role in determining the value of your business, but they have some key differences in how they’re calculated.
Let’s break it down in plain language:
SDE is a measure of your business’s cash flow that takes into account not only your compensation and benefits as the owner but also those extra perks and discretionary expenses that aren’t directly related to the day-to-day operations of your business. It gives you a broader view of the actual cash flow available to you as the owner.
On the other hand, Normalized EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. This metric represents your business’s earnings after subtracting those specific expenses. It’s also adjusted for any unusual or one-time expenses, or income, that might not be reflective of your business’s regular profitability.
The main distinction between SDE and normalized EBITDA lies in how they handle owner compensation and benefits. SDE takes into account those additional perks you enjoy as the owner, giving you a more comprehensive view of your business’s cash flow. On the other hand, normalized EBITDA focuses on the underlying profitability of your business, excluding those owner-specific adjustments.
Now, it’s important to note that SDE is commonly used in Main Street and small business transactions that target individual owner-operator buyers. It helps them understand the true financial picture, including the benefits they can expect as the new owner. On the flip side, buyers in the lower middle market tend to rely on normalized EBITDA as it provides a clearer view of the business’s profitability without the specific owner-related adjustments.
So, whether you’re considering selling your business or evaluating its value, understanding the difference between SDE and normalized EBITDA is crucial. These metrics give potential buyers insights into your business’s financial health and help you make informed decisions.
Remember, knowledge is power, and having a solid grasp of these metrics will put you in the driver’s seat when it comes to selling or assessing the value of your business to different types of buyers.