What Number Do I Multiply? SDE, EBIT, EBITDA?

Subscribe to my list and never miss a video: www.DavidCBarnettList.com
Learn to buy a business at www.BusinessBuyerAdvantage.com
Related article:
KZbin viewer Canucklehead wants to know which number to multiply and when.
Great question.
One of the biggest problems in business valuation is when people confuse valuation factors.
Apply a 3X EBITDA factor to SDE and you’ll overpay for the business.
But are these hard and fast rules… or just guidelines?
In this week’s video, I discuss when the different cash flow levels made sense and why, in the end, you need to be thinking beyond just math.
Watch this week’s video here: • What Number Do I Multi...
Learn how to buy an already-successful and profitable business even in the covid-recession www.BusinessBuyerAdvantage.com
Book a call with me at www.clarity.fm/davidbarnett
Books can be found in my Amazon store: www.amazon.com/shop/davidbarnett
Stop missing my new videos. Join my email list here: www.DavidCBarnettList.com
Want to look dangerous like David? Jeff Alpaugh Customs has a special offer for you: www.JeffAlpaugh.com/DCB10
business broker mergers and acquisitions business brokers mergers and acquisitions explained

[@antoniostephano]

Appreciate this topic. I have been investing in real estate and had been confused as to the differences between real estate NOI and "cap rates" and other businesses that use EBITA and so on. Thank you for shedding light on this confusing topic.

[@DavidCBarnett]

Glad it was helpful!

[@patrickwilliams7552]

Great content thanks man! Just got a new sub.

[@DavidCBarnett]

Thanks for the sub! Glad to be helpful.

[@burtonic2641]

Good one - brings a lot of concepts together

[@DavidCBarnett]

Thanks Burtonic.

[@AdamEgret]

Knucklehead's not such a knucklehead after all.

[@DavidCBarnett]

Please don't be mean. I really like you.

[@AdamEgret]

@@DavidCBarnett I was hoping it would come across as a funny compliment. No offense knucklehead.

[@dangalbraith6187]

Incredibly timely David! I was just going over the financial statements for a company here in NB I'm considering buying but between cashflow, EBITDA, SDE, etc I'm a little overwhelmed. We may be talking in the near future 👍

[@DavidCBarnett]

Would love to help out Dan. My email is easily found over at www.DavidCBarnett.com or find me on Linkedin. Cheers.

[@skesno309]

Love your intro now.

[@DavidCBarnett]

Thanks Windsor

[@msway836]

Like the point you made about Risk, that every Business is on their Way to Obsolescence, get in Increase Value and Sale/Flip it in 2-3 years...

[@DavidCBarnett]

The point is that you need to innovate all the time. Long-lived businesses are not doing the same thing as 100 years ago. If you get in and increase value, you'll realize it's more lucrative to keep it. Selling is almost always personally motivated in the SME space.

[@markallen8254]

I've been doing the "Challenge" recently and have felt that a lot of stuff was glossed over. Sure, it's possible that its covered in the (well priced) content, but I was never comfortable with the assurance that 100% no-cash-down deals are available for everyone, no matter your circumstances or personal wealth. It has been refreshing to see you deal with that (in another video) and providing a lot of substance at this level of engagement. I'll be signing up for your course shortly. (I'm sure it's all the same in Australia as it is in Canada / US)

[@DavidCBarnett]

All around the world, lenders want to see investment on the part of buyers and a demonstrated capability to manage a business and their own money. A broke person has demonstrated that they can't manage their own household finances. Check out this page if you want more info on these scams... www.investlocalbook.com/p/buy-business-with-no-money.html

[@snorttroll4379]

@@DavidCBarnett what would entice an equity investor to join a broke person with a good team?

[@rubenrodriguez5612]

Hello David, great content, thank you for your videos. Question on consulting agreements: “For Main Street or lower middle market deals, after the typical 30-day transition period post-closing, what are the typical consultant agreements between sellers and buyers you see post-closing? In terms of duration of the agreement, payment terms, and overall involvement of the seller?” Thank you!

[@DavidCBarnett]

Great question, it's on the list.

[@behindthelast4198]

Hello David thanks for the video. I was thinking if you can talk about Royalty Financing like Kevin o Leary does from shark tank. Its where you get a percentage of the sales from the business for a agreed upon amount of time and a small portion of equity. I was wondering if you know what that is and can you talk about it in the future, Again thanks.

[@DavidCBarnett]

Great question. It's on the list.

[@Kingdia97]

Dave can you please a course on accounting for small business owners ( for ppl that don't have an accounting/business background at all).

[@DavidCBarnett]

There are a lot of people teaching accounting online. If your goal is to understand financial statements (reading the reports of how businesses are doing, either to analyze or manage them) then you'd gain immense knowledge from doing my cashflow forecasting and business plan program over at www.BizPlanSchool.com Over the course, you end up building a complete set of financial statements and projections for a business.

[@user-xi3yv3tw1b]

Thanks for this great information. When valuing a business using SDE, is it common or expected to add on equipment and normal operating inventory?

[@DavidCBarnett]

No. The number is the value of the cash flow and should include everything required to make the business work. So equipment is included and inventory is more complicated. I have a video all about it here: kzbin.info/www/bejne/jmevkJeJZ8yFj9U

[@babupotunak4854]

if you could explain with some good examples with some numbers would really help

[@DavidCBarnett]

Watch this video: kzbin.info/www/bejne/e2GsdnqqqK54Z9E cheers

[@bedokboy75]

Good stuff David. What do you say to biz owners who erroneously want to add their business property on top of the final amount?

[@DavidCBarnett]

I would say that if they've done a proper job of normalizing the fair market value of the real estate by adding a rent expense to the income statement that adding the value of the real estate to the enterprise value is not an error. You should do my Business Buyer Advantage program to learn this in-depth. Businesses and real estate are two distinct classes of asset which are valued in different ways, you don't want them mixed together in the same equation unless it's in one of a few categories where the building IS the business. ie mini-storage, hotels, motels, special care homes, or immovable industrial installations like sugar refineries. Learn more at www.BusinessBuyerAdvantage.com Cheers.

[@penelopekeys8911]

Can you please explain what the abbreviations stand for, in your video

[@DavidCBarnett]

Sellers Discretionary Earnings, Earnings Before Interest and Taxes, Earnings before interest, taxes depreciation and amortization.

[@azulmarineintl.5346]

I wanted to know about a bit more regarding ... retained earnings and price ? the issue for me if there is large amounts retained plus in a share/stock purchase a requirement if warranties&indemnities is obligatory.. but what are your thoughts on this of end price ? R.E's + valuation price ? I feel that EV + R.E's is excessive at closure or price agreement, thoughts ?

[@DavidCBarnett]

I think this is a great question for a video. Stay tuned...

[@marcojosezgimenez]

If you base buying price on SDE and EBITDA x multipliers do you add back working capital (assets -liabilities) on top of that? If not How do you value the property/machinery/ receivables still outstanding in the business? Or are you thinking that will double count the buying price, since you won't get the aforementioned SDE and EBITDA without the underlying property/equipment Assumption is that the equipment is not fully depreciated

[@DavidCBarnett]

What you're buying is the cash flow. The price you pay needs to include everything you need to make the cash flow flow. Check out this video: kzbin.info/www/bejne/jmevkJeJZ8yFj9U

[@marcojosezgimenez]

@@DavidCBarnett had a follow up question on your video. Appreciate the insight

[@minutescouldsaveyoupercentormo]

This goes as well for US companies ?

[@DavidCBarnett]

Yes.

[@minutescouldsaveyoupercentormo]

@@DavidCBarnett thank you Mr.David

[@stjepanvidovic7193]

I am calculating SDE & EBITDA for one of my partners...As the business is digital, company doesn't have much COGS and when I get the result SDE is higher than the revenue...And partner is asking how can revenue be lower than earnings? So started to wonder if I am doing it correctly...For example, revenue is $400K and SDE is $450K

[@DavidCBarnett]

Your partner is correct, that is impossible.

[@stjepanvidovic7193]

@@DavidCBarnett yep, we figured it out. Mistake with data. But is it good if the difference between revenue and SDE is really small? For example if revenue is $330K and SDE is $325K? Is is showing some negative trends or?

[@DavidCBarnett]

@@stjepanvidovic7193 It just means that there are very little expenses. But, if you have a partner, then the SDE should not be close to revenue if you're both working in the business because an SDE is only for one full time working owner/manager. If two owners work in a business, then one of them has to have the FMV of their labor in the salary expense. You can't have two owners in SDE. Common mistake I see often.

[@stjepanvidovic7193]

@@DavidCBarnett Thanks for that. Have one more Q for you: We have 3 LLC's ( different subsidiaries) ..Also the companies are, so to say tax free..and didn't pay any interests....and the business is digital so there is only amortization (intangible assets) to use in equation for EBITDA & SDE? Nothing physical in our company (remote based)

[@snorttroll4379]

@@DavidCBarnett why do we talk about these kinds of terms rather than just the debt service number, which would be real cash flow, money you can burn in the fireplace (if it was legal) or donate to charity (if it isnt marketing)

[@snorttroll4379]

BArnett'§!!! You have to pay interest, so that money is not available to service debt. why on earth is the 'I' part of those numbers?

[@DavidCBarnett]

Because your interest expense will be different than the seller's historical interest costs.

[@snorttroll4379]

@@DavidCBarnett I dont get it. we are looking for what ... ah. now I might get it. his debts will be refinanced at new terms when you take over and you will have another expense?. But still. you wont have no interest payments so you still should not be paying a multiple of that number. you have to see what the cash flow will be after taking over. Isnt it better to just see what the business can burn in the fireplace now and base stuff on that?