Should you use EBITDA or SDE when pricing a Las Vegas business for Sale?
Find out the difference and which one you should be using to value your business.
EBITDA and SDE are two different ways of measuring the earnings or income of a business. EBITDA is earnings before deducting interest, taxes, depreciation, and amortization. SDE or sellers discretionary earnings is basically the same as EBITDA except adding back to the total amount the owner's salary as well as the owner's benefits. In calculating EBITDA and SDE, at least when it comes to pricing and valuation of a business, we typically add back non-recurring or one-time expenses not relating to the business being sold. These expenses are removed and add back to the net income. Normal expenses for operation and equipment should be included.
So, should you use EBITDA or SDE when pricing a Las Vegas business for sale? The answer is it depends. Typically, when I value the business at First Choice Business Brokers, I use SDE and take a standard "rule of thumb" multiple based on the industry or niche of the business. However, the same principle applies to EBITDA, the multiple is slightly different but in the end, you get a pretty close figure on the business valuation either way. Almost always, the SDE figure will be a higher figure than EBITDA so naturally, the multiple when using SDE will be lower than the multiple when using EBITDA. Just be sure not to use the same multiple for both figures since this will always result in a misvalued business. Companies like BIZCOMPS or publications like Business Reference Guide can provide you the industry standard multiple for both SDE and EBITDA, you'll want to make sure that you are using the right industry multiple, then adjust it for what is happening locally (wherever you are selling the business) and then customize it for the individual details of the business being valued or sold.
One of the main reasons we use SDE when selling a Las Vegas business, is the majority of the business we sell are small businesses, which means the owner is active and a vital part of the business. Even if they are not full time, they are still involved in the weekly operations and decision making. Because small business owners typically don't generate enough net profit to hire a general manager, SDE is used to calculate and account for the owner's salary as they act as business manager.
If you are looking for a Las Vegas business for sale, feel free to reach out. I am happy to help you by providing a free business valuation and act as your broker representative to ensure a smooth transaction or help you find the ideal business. You can get a FREE copy of my #1 best selling book on Amazon "The 7 Figure Exit Plan" by clicking the link.