Business Valuations – The top 20 most valuable businesses Ever wonder what a business is worth? Unless you are a business owner, the tax collector, or a business broker, it may not cross your mind. But, I came across some interesting information on BizBuySell.com and I figured I would share. Read more…
Riverside County Business Sales up 30% while San Bernardino Co Business Sales are Down 24% (2019 1 vs 2018 Q1) Number of Businesses Sold in Riverside and San Bernardino Counties Jan Feb Mar Total % Change vs 2018 2019 Riv Co 59 79 99 234 +30% 2019 Sbd Co 30 Read more…
If you have been looking to buy a business, you may have seen listings referring to Seller’s Discretionary Earnings (SDE) or Discretionary Cash Flow (DCF), Owner’s Discretionary Income (ODI), Owner’s Discretionary Cash Flow (ODCF), or adjusted earnings. These terms are all referring to a business’s adjusted profits to show potential Read more…
1. Stop minimizing taxes; instead maximize reported profitability Many small businesses utilize the cash-basis of accounting rather than the accrual basis. Doing so enables businesses to accelerate expenses into the current tax year and defer revenues to the following tax year. This is a very aggressive method of minimizing Read more…
Business Valuations – What is your business worth?When you are considering to put your business for sale, you need to establish a purchase price. What is your business worth? The question seems simple enough, but the answer can differ on who you ask. For our purposes, let’s take the potential Buyer’s perspective. Afterall, he or she will be cutting the check. A potential business buyer is looking for value based on his/ her potential earnings, and that is really the bottom line. How much will the buyer make from owning your business? This is why, for the majority of main street businesses, you need to adjust the earnings of a business, as reported on the business’s tax returns. This adjustment, is what we Business Brokers, call the Seller’s Discretionary Earnings or SDE.
Great question. Why do you need to adjust the earnings reported on a business’s tax returns? Answer: because business owners are purposely (legally) trying to reduce tax liability. So business owners expense items to accomplish tax reductions or to transfer tax liability … for example, an owner can give herself a huge salary, to the point that the business profit is zero. This is legal, right? Now the business have zero tax liability, and now she will report this income, in the form of a salary, on her personal tax returns. This is why we, Business Brokers, call these expenses Discretionary, they are subject to the discretion of the seller.
There are several business valuation methodologies. Asset based approach, earnings based, even market based valuation methods. However, for the vast majority of “main street” businesses with net earnings less than $500,000, the most used valuation method is an earnings based method using a Seller’s Discretionary Earnings calculation and an industry specific multiple of this SDE calculation.
What are Seller’s Discretionary Earnings (SDE)? The simple explanation is as follows: when you run a business you want to lower your taxable income, as such the owner will legally apply business expenses to their taxable income statement. However, some of these items benefit the owner and thus are discretionary. Items like: the lease of their car, the owners salary, travel and entertainment, etc.
Calculating seller’s discretionary earnings is the first and most crucial step towards setting the selling price of a business or a business valuation. Once you calculate the true owner’s discretionary earnings you apply a sales multiple and you have your price. Sometimes seller’s discretionary earnings is called business re-casted earnings as well. Under either name, it is the basis for sale pricing and of primary interest to buyers. (more…)