Net Profit is not Cash Flow - EBITDA or SDE! Buying a Business and SBA.

[@snapfires5127]

The best explanation I have seen for EBITDA, SDE and their understanding

[@adventuresnorthwest]

Thanks.

[@HandsOnRealEstate]

Thanks !

[@bekchik]

This was great!

[@adventuresnorthwest]

Thanks! Glad you enjoyed it.

[@laviolist]

Gold! Thank you!

[@Useryofcsdnx]

THANK YOU!!

[@adventuresnorthwest]

Thanks!

[@PowerFisherman]

Nice Video. How do you treat situations where (1) the seller's tax returns are cash based and (2) seller's company reports it's financials on a GAAP accrual basis? Or a construction company using completed contract method of accounting to recast EBITDA and SDE on an accrual basis (which would be the real cash flow) to provide meaningful information on for valuation and coverage ratios? I don't know if I asked the question the right way...just how do you (1) calculate EBITDA and SDE for (2) valuation and coverage ratios (3) on a GAAP basis when (4) the tax returns are not accrual based or GAAP based. Big Thanks....Your Videos are THE BEST.

[@adventuresnorthwest]

Great question. Let's start with the Cash vs. Accrual question. For valuation and bank financing (Banks use the tax returns as the source of truth), you need to use the tax basis reported to the IRS, i.e., the tax returns. In the past, I have spread the tax returns (Cash Basis) and internal financials on an accrual basis over five years for comparisons and to calculate the cash flow and working capital analysis. Especially in a trade company (HVAC, Construction, Plumbing, and Electrical), you must pay attention to the Work In Progress or WIP on the balance sheet. 95% of the time, it is an accrual-based report. I would run the coverage ratios both ways. They should be close if you average the SDE or EBITDA over a 5-year period. Again, great question.

[@firulay1023]

For the SDE you have $210k a year as owner compensation and for DCR you have $150k a year. What am I missing?

[@adventuresnorthwest]

Thanks for the note. The $210k is what the owner was making, and the $150K is the new owner's salary for the DCR calculation. Hope that this helps

[@SimoneDoyle-e8t]

At min 13, I'm confused how you're showing a payment of $31k from a loan amount of $2.55M @8.5% interest over 10 years. I'm sure it's a simple solution I'm overlooking. Thanks!

[@adventuresnorthwest]

The monthly payment on the acquisition loan of $2,550,000 at 8.5% over a 10-year period is s $31,616. I could have made it a little clearer. Hope this helps.

[@iqbaljohal2352]

Good morning, So if you see ebitda you have to take payment and interest out to come with the net gross to see what you’ll save. Is that right? I’m looking into a franchise and they want $6.5 million last year ebitda was $725,000 this year they are showing $900,000. What’s your take?

[@thecbbgroup]

Great question. The EBITDA of $725,000 should represent net profit from operations, before any interest payments, taxes and depreciation/amortization. If you used a Multiple of EBITDA of 4.5, ($725,000 x 4.5 = $3,262,500). The price seems very high given the EBITDA, but without all the details can't really tell. I will be in the office on Monday if you want to call and discuss. Thanks Brent