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The Rules For Being Human…

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Disagreement With Business Buyer: How to Adjust Earnings for Owner’s Salary

 We are representing a company that is for sale, and a few days ago I received the following about that company:
 

Ney,

I decided to pass on this business. The reason is following:

I do not agree with your adding back full owner’s salary of $120K and car expenses of $14K. Owner’s salary is entirely addable only in case of absentee ownership. Correctly it shall be normalized by replacing by market manager’s compensation. Compensation of $120K seems for me market. As well manager shall have company car. So here we have $135K deducted from SDCF.

You forgot to deduct CapEx ( expected capital expenditures). I may expect correct CapEx for such company as $100-150K. So in total we have reduction of about $250K  Such company, worth max 2x multiple of last year or $xxMM.

 I understand anyone passing on buying a business for any number of reasons.  But a couple of things about this email I couldn’t let go.

Adding back owner’s salary to Seller’s Discretionary Earnings (SDE) has nothing whatsoever to do with absentee ownership.  It is the definition of SDE.  You always “add-back” owner’s salary.  I think the gentleman was getting SDE confused with Discounted Cash Flow.  It is confusing, because many brokers use the term Seller’s Discretionary Cash Flow SDCF and SDE interchangeably.  Really they are not, because SDE is not a true cash flow number.  There is an effort by the IBBA (www.ibba.org) and IBA (www.go-iba.org)  to get all brokers and M&A advisors to use the terms SDE (or just DE) instead of SDCF or SCF.

It is important to understand that what is used in many valuations of small/medium sized businesses and what is posted on the business-for-sale websites is SDE.  None of the companies listed on bizben.com, bizbuysell.com, etc. should include owner’s salary or manager’s salary, unless they state otherwise.   If some did and some didn’t, we would lose the ability to compare similar companies.

CapEx is also not included, although this is some argument that can made to include this expenditure.  Why not included?  Because SDE is a term used for small to medium sized businesses – where the market approach to valuation is typically used.  Since manager’s salary and CapEx are subjective, and honestly many brokers have a hard time coming up with consistent values for these, they are left out. 

There are “done deal” databases such as Bizcomps, BVMarketdata and others that business appraisers use to statistically compare companies.  If some brokers included owner’s salary if a business were absentee ownership (in their opinion) and others did not, you could not compare them.  Same with CapEx.  If a business was a heavy consumer of equipment, then this would naturally appear as a low multiple when comparing done deal data.  This does break down sometimes when there isn’t a lot of data.  Also, if a company has not historically kept up with equipment purchases (i.e. run down equipment), there should be an adjustment for this.

You can include a manager’s salary, but this is called EBITDA.  It is a different number and different definition than SDE.   Certainly, you can not apply a rule-of-thumb SDE multiple to EBITDA as this gentleman appears to have done.  It doesn’t make sense. 

You can also include CapEx, but this is typically included when doing free cash flow and discounted cash flow analysis, which is called the Income approach to valuation. Certainly these are valid things to do.  In fact,  I wrote previously about a valuation program, BVX, that I use that takes manager’s salary and CapEx into account, then calculates a business value based on the expected ROI of the buyer. 

In the end, this buyer also questioned whether the earnings level of the company was sustainable, and in his conservative view that alone was sufficient means to pass on the opportunity.  Which was fine.   However after some email exchanges I was still unable to convince him about manager’s salary and SDE.  Oh well, I tried.

Tricks to organise the best Christmas party for your employees

Home » Business Ideas » Tricks to organise the best Christmas party for your employees
September 21, 2016 Frank Bullock Business Ideas
As a business manager or owner, you should get involved in organising the Christmas party for your employees, because this is the simplest way to show them that you appreciate their effort. Yes you can charge someone with the job, but you should keep in touch with the person, and ask them from time to time about the status of the preparations, and if you can do something to help them. Also, you have to be the one who makes the decisions, at the end of the day, because you can state the budget of the party. If you want to plan a unique office Christmas party Melbourne, you should consider hiring the services of some corporate entertainment companies, because they have experience in the domain, and they can help you amaze your employees.

Hire corporate entertainers

The first thing you have to do after deciding upon the date of your event, is to get in touch with a company that provides corporate entertainment services, and see what options they can offer you when it comes to organising your party. If you want to offer them a unique experience, you can opt for a reptile encounter, which means that some unique animals guests would come at the party and the employees have the possibility not only to admire them, but also to touch them. You do not have to worry that you bring wild animals in the office, because these ones are hand tame animals, which are accustomed with people around. You can ask the company to bring different species, because some people do not ever have the possibility to see these animals in real life, so they would take it as an opportunity, and they would be grateful to you.

Ask about food preferences when it comes to menu

In case you decide to organise the event in a restaurant, you would have to choose from some standard menus, but if you organise it in your office, you would have to discuss with the catering company and see what options you have. You have to consider in this case the dietary needs for your employees, because some of them might have certain allergies, and you have to be sure that you do not include those ingredients in the dishes you order.

Plan a gift giving activity

Do not forget that you plan this party because Christmas is close, so you should not skip and organise a gift giving activity. You can offer gifts to all your employees, or if you want to organise a more interactive activity, you can play Secret Santa. If you are opting for this type of activity, you should set a budget, and make sure employees know it. Also, you have the possibility to organise a group charity donation for a local orphanage. You are the one who should decide upon the gift giving type of activity, but do not forget to plan it, because it is essential for a successful Christmas party.

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