Transcript
Part 2. The Words in Plain English Every term in the guide, one at a time, with the same worked example used on the page. Start with the money words. SDE stands for Seller's Discretionary Earnings. It is the money the business throws off for one owner who works in it. Profit plus the owner's salary and perks added back, because the new owner would take that pay too. Example. A shop shows $210,000 of profit, and the owner pays himself $90,000. SDE starts at about $300,000.
Recast SDE is SDE fixed for real life. You subtract with the listing quietly left out, a market salary for a manager to replace the owner, market rent, and costs the seller called one time but pays every year. If the seller claims $450,000 and a real manager costs $80,000 and other honest fixes cost $20,000, recast SDE is $350,000. So that is recast SDE. Start with the seller's number, subtract the real costs of running the business without the owner working in it, and what is left is the honest cash flow.
In our example, that is $350,000. Every price from here on is judged against that kind of honest number. A multiple is priced divided by cash flow. It answers one question. How many years of today's earnings am I paying for up front? Take that same business. The asking price is $1,050,000. Divide by recast SDE of $350,000, and you get three times. You are paying three years of cash flow up front. Small businesses mostly sell between two and 3.1 times SDE.
EBITDA is profit measured with the owner's pay left out because a paid manager is already in the costs. Bigger businesses, over $2 million, are priced on EBITDA. Small ones are priced on SDE. Comparing the two yard sticks against each other is the most common first buyer pricing mistake. Now the paperwork words, an NDA, a non-disclosure agreement is your written promise to keep the deal quiet. Signing one is normal before a seller shares financials and it does not commit you to buy anything.
A CIM, a Confidential Information Memorandum, is the sales book for the business. The broker's polished packet with the story, the financials, the staff, and the customers.
You get it after the NDA. Read it like a sales document, because it is one. A teaser is the short anonymous preview you see before the CIM. It describes the business without naming it.