Quick hacks - Valuation without all the information

What BizBuySell Typically Lists

• Gross Revenue (Sales) – Top-line revenue (often last year’s)

• Cash Flow (sometimes labeled “Net Profit”) – May or may not equal SDE (depends if they’ve added back owner salary/perks)

• Inventory / FF&E (Furniture, Fixtures & Equipment) – Included or not included in asking price

• Asking Price – Seller’s target price

• Real Estate – If included or leased

• Established Year – Age of the business

• Employees – Number of employees

• Reason for Selling – Often generic (“retirement,” “other interests”)

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Problem

• Many listings don’t clarify SDE vs Net Income.

• “Cash Flow” might exclude owner salary (true net profit) or include owner salary (SDE).

• Brokers don’t always break it down until you sign an NDA.

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How to Get the Real SDE

1. Ask Directly (after expressing interest):

   • “Can you clarify if the cash flow listed includes or excludes owner salary and perks?”

   • “Do you have an add-back schedule showing how SDE is calculated?”

2. Request Financials Under NDA:

   • Last 3 years tax returns and P&L statements.

   • Owner compensation and discretionary expenses list.

3. Reconstruct SDE Yourself:

   • Take Net Profit → Add back owner salary, perks, one-time expenses, depreciation, interest, taxes.

4. Cross-check with Broker:

   • Confirm what expenses are “owner benefits” vs. operational.

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Quick Hack Without Full Financials

• Rule of thumb: SDE ≈ 10–20% of Revenue for boring service businesses (HVAC, car wash, laundromat).

• Example: $1M revenue → likely $100k–$200k SDE.

• Use this for initial screening until you get the books.

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Next, a list containing the Estimated SDE, and other valuation "hacks" that can provide estimated valuations with incomplete information.

List of additional hacks

1. Estimate SDE (Seller’s Discretionary Earnings) as 10–20% of Revenue
   SDE = Net Profit + Owner’s Salary + Owner’s Perks + One-Time Expenses + Interest + Taxes + Depreciation + Amortization
   Think of SDE as the true “owner’s paycheck” — how much money the owner actually takes home from the business each year, including salary and perks.
   Formula:

   SDE = Net Profit
         + Owner’s Salary
         + Owner’s Perks/Benefits
         + One-Time Expenses
         + Interest
         + Taxes
         + Depreciation
         + Amortization
   

   Example:
   If Net Profit is $100k, Owner Salary $70k, Car $5k (perk), and a one-time fee $10k,
   then SDE = $100k + $70k + $5k + $10k = $185,000

2. Use 2.3–2.5× SDE as Purchase Price Multiple
   Multiply your estimated SDE by about 2.3 to 2.5 to get a fair offer price.
   Example:
   If SDE = $200,000, then Offer Price ≈ $200,000 × 2.34 = $468,000

3. Calculate Cash Flow Margin
   This shows what portion of revenue turns into profit after all expenses.
   Formula:

   Cash Flow Margin = (Net Profit ÷ Revenue) × 100%
   

   A 10–20% margin is healthy for most service businesses.

4. Look at Seller’s Asking Price vs Revenue
   Asking price shouldn’t usually exceed about 50% of annual revenue.
   Formula:

   Price-to-Revenue Ratio = Asking Price ÷ Annual Revenue
   

   If ratio > 0.5, dig deeper.

5. Check Business Age & Stability
   Longer operating history (5+ years) with steady or growing revenue lowers risk and can justify a higher multiple.

6. Review Industry Multiples
   Different businesses use different multiples based on earnings measures:

   • EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) = Operating Profit + Depreciation + Amortization

   • Software companies often sell for >5× EBITDA

   • “Boring” businesses usually sell for 2–3× SDE (owner-focused earnings)

7. Factor in Owner Involvement
   Owner-dependent businesses have more risk and usually lower valuation multiples.

8. Don’t Overpay for Real Estate
   Value real estate separately to avoid inflating the business value.

9. Assess Customer Concentration
   High concentration (>20% revenue from 1 or 2 customers) increases risk and reduces valuation.

10. Adjust for Seasonality
    Seasonal sales cycles may require valuation discounts unless you can manage cash flow swings.