Business Valuation Blog | Understanding Buying / Selling a Company

What is SDE and Owner’s Overall Contribution to a Business?

Posted by Business Valuation Specialists LLC on Jul 5, 2021 8:00:00 AM

Business Valuation SDE Owners Overall Contribution

Seller's Discretionary Earnings (SDE) is a type of income measurement that is calculated when a business is changing hands. SDE is a specific calculation involving earnings before interest, taxes, depreciation, and amortization (EBITDA), which was discussed in our last blog post, as well as other factors that impact a company's value as you engage in a buy/sell transaction. Here's a look into SDE and how it measures the value of a company

SDE is a useful tool from both the buyer and seller’s perspectives. If you're on the purchase or acquisition side, the seller's discretionary earnings will provide you with the information needed to develop a reasonable estimate of your expected return on investment (ROI), as well as obtaining an understanding of realistic expectations going forward for the business. From the seller’s viewpoint, this measurement allows you to support a high level of overall value during sale negotiations. Understanding SDE allows you to make informed decisions while preparing to buy or sell.

As noted earlier, SDE utilizes EBITDA and considers the owner's overall value to the company and the benefit they derive from the business, above any salary paid. Here is what is typically considered when measuring the owner's overall value, compensation, and benefit:

  • Value estimate of the owner(s) overall contribution to the business: The owner’s value to the business is a combination of the revenue that can be directly tied to a specific owner, as well as the value derived from their day-to-day operation of the business. This is especially important when a share of a business or partnership is being sold with multiple owners. When owners actively participate in operating the business, this measurement requires that historic, current, and projected benefits be calculated to determine the value of the selling owner's sales efforts and overall labor in the company.
  • One-time expenses: Owners benefits from the business include any number of expenses that are charged to the company and will cover a wide range of one-off or annual purchases, including items such as website design services, home office leasehold improvements, licenses, certifications, application fees, organization memberships, as well as any number of similar expenses to the company.
  • Home office and business expenses reimbursed or charged to the company: These would include reimbursable monthly costs for the owner’s home offices, including rent, utilities, healthcare, life insurance, transportation, certain travel & living expenses, and related items.

With an understanding of how SDE and the owner’s overall contribution to the business are measured, you can gain a better understanding of your company’s overall financial health and how it is viewed in the industry. Seeking a more detailed independent measurement of value for your company, especially if you plan to sell, expand or refinance debt is always a sound idea. A certified business appraiser will provide you with the overall value of your company, as well as information on the market, industry, competition, and the strengths and weaknesses of your company.

Tags: company valuation, business valuations, valuation consultant, Seller's Discretionary Earnings, SDE, Owner's Overall Contribution

How a Company Valuation is Different Between Business Organization Types

Posted by Business Valuation Specialists LLC on Oct 31, 2018 1:39:00 PM

How is your business organized? Many companies are aware of at least some of the benefits of organizing under each of the different business types, but did you know that there is at least a little difference between how each of these companies are organized and how they must be handled in the company valuation process? Here's a quick look at the differences between each basic business organization type and the impact it can have on your overall appraisal process.

How a Company Valuation is Different Between Business Organization Types

Sole Proprietorship

A sole proprietorship is the most basic legal organization a business can have. It can be one or multiple people acting in the interest of the business, but it's assumed that they act as one body in the interest of the company. It provides very little in terms of legal protection, so if your company were to be sued, you could also lose your home and other assets in the process. The higher level of liability must be factored into the potential for losses and any mixing of personal and business funds must be sorted out in the appraisal process.


A partnership is more detailed than a sole proprietorship and should have some documentation laid out at the beginning of the partnership to determine who owns what amount of the company and what must be done should the partnership be dissolved. It helps avoid arguments at the end of the business by having everything in line ahead of time with regards to how to split up the profits or losses when the business closes or is sold. This process is taken into account during appraisal with each partner's share calculated from the total appraised value.


Also referred to as a pass-through corporation, this type of corporation requires more paperwork to establish as a proper corporation, but also provides legal protections to the owners. However, unlike a C-corporation, an S-corporation passes earnings through to the owners, so rather than the corporation paying taxes on profits, the owners report these profits and pay the taxes on them on their personal tax returns. This can create additional growth that is factored in during an appraisal.


A C-corporation is a fully incorporated entity that exists completely separate from the owners. Like the S-corporation, it requires more paperwork to incorporate, but the taxes on profits are paid by the corporation before they are distributed to the owners, at which point the owners also pay taxes. It also provides more legal protection to the owners as it stands as its own entity. This double taxation is taken into account in terms of the corporation's growth in appraisal.

Limited Liability Company

A limited liability company or LLC is a company or corporation that is specifically set up to limit the amount of liability a company or its owners may be exposed to in the course of doing business. It can be set up in any number of organization types, but is generally designed to provide protection to the owners rather than any specific tax or appraisal benefits.

By understanding the differences between business organization types, you can gain a better understanding of how each organization works and how it affects the way that you do business on a daily basis. It also provides you with opportunity to better understand the impact it can have on your company when it's time to have an appraisal performed. Make sure to work with a certified business appraiser when you have your company valuation performed to ensure you're getting the best possible information and accuracy out of your investment.

Tags: company valuation

Exactly how do you figure out how much is a business worth?

Posted by Business Valuation Specialists LLC on Mar 22, 2017 4:01:00 PM

how much is a business worth today.jpg

How much is a business worth? This question has plagued business owners for centuries. Unfortunately, the answer to that question, as to so many in life, is that it depends. What are you trying to do with the business? Why are business appraisals needed at that time? Will the current market conditions change the valuation of a company compared to a year from now? How does today's business owner figure out what their business is worth? Here's some quick insight into how a business is valued and the process that is used to calculate that value.

Exactly how do you figure out how much is a business worth?

Determining business value is a complex process. It involves looking at the business' individual practices, market share, goodwill in the community and income levels. It can also involve the market and industry conditions, the urgency of a sale, the perceived value of the company's brand and any number of other aspects that are often dismissed as inconsequential to the business value as a whole.

Part of the calculations are based on why the valuation is needed. If you need a valuation of your business because you're considering expanding and want to make sure you're on solid financial footing first, you'll need a completely different valuation than someone who is having to quickly sell a business to settle an estate due to an untimely death or the dissolution of a partnership or marriage.

Another area that can come into play is the current industry and market. If the business is positioned to take advantage of new technologies or innovations in the industry, the business' value to drastically increase beyond what the business owner may otherwise calculate. If, on the other hand, the business is floundering due to industry changes or poor market conditions, using an older business value may leave you open to risk as you overextend your credit trying to keep up with poor economic conditions.

Simply basing your business value on similar businesses that have sold recently may not give you an accurate view of your business' value either. If the business you are comparing to has a more favorable location, better position in the industry, specialties that you have not diversified into, different income levels or other aspects that impact the business' overall value, you may be under- or over-valuing your business' actual worth. 

Is your business a household name or a newcomer to the industry? This can make a big difference in how reactive your business will be to changes in market conditions. What about your reputation? A good reputation will often improve your business value as your customers perceive a higher value to the products and services you provide when compared to a competitor.

As you can see, the question of how much is a business worth is a very complicated one that requires significant experience to accurately answer. Fortunately, as a business owner, you don't need that experience. A business valuations specialist who has experience in your industry and special area of operation spends their days looking at businesses like yours to determine those values using standardized methodologies developed for specific situations.

Tags: business value, company valuation, how much is a business worth

Is It Worth the Cost to Get a Business Appraisal?

Posted by Business Valuation Specialists LLC on Nov 19, 2015 10:30:00 AM


Though many companies don't have regular business valuations performed, a business appraisal is a great way to take a look at exactly where your company's financial situation is and how it can be improved. Valuation of a company provides vital details to help you decide whether a change or investment you're considering makes good sense and doesn't put your business in a risky financial situation. But is it worth the cost? Absolutely! Here's why:

Why it's worth having a business appraisal performed

Getting a professional company appraisal done on your business helps you know exactly what you have and don't have. By knowing what the bottom line is, you're putting yourself in a good situation if an opportunity comes along, if you need to negotiate a contract or otherwise make a major decision for your company. Here's why business appraisals make good sense:

  • Depreciation doesn't give you actual net worth. Your tax accountant may have depreciated your delivery van over five years, but if you're still using it ten years later, that's five years where that van's value doesn't show up on your business' net worth statements.
  • You're not sure that your tax assessment is accurate. How do you fight a bad assessment without knowing what your company is actually worth?
  • Your market is booming and your bottom line doesn't reflect it. If you'd been an oil equipment dealer a decade ago in Williston, North Dakota, your business may have not been much more than the local hardware store, but when oil was discovered, your business' market value may have skyrocketed.
  • You don't have a clear picture of your business' financial situation. Because you don't know all the conditions that can affect your business' value, you can't make wise business decisions and may put your business in a risky position based on poor financial information.

The situations where it's helpful to have a business appraisal

But when is the best time to have a business valuation performed? Here are some common situations:

  • Making an investment in a company. When you're considering putting funds into a company as an investment, you want to know that the information you have on the company is accurate to ensure your investment is safe.
  • Looking at expanding your business. If you need to finance a business expansion, you're more likely to get a favorable loan rate if you can prove the true net worth of your business and the collateral that backs those figures up.
  • Considering a merger or acquisition. It doesn't matter which side you're on in this situation, knowing what your company is worth going in gives you a stronger position at the bargaining table.
  • Selling or passing your company on to the next generation. Much like looking at mergers and acquisitions, knowing what your company is worth helps you get a fair price and documents the value for the new owner.

As you can see, having a business valuation performed on your company can help you determine its financial health. But what about the company that is performing the company appraisal? You'll want to find a company with a reputation for excellence and that uses Certified Valuation Analysts (CVA) through the National Association of Certified Valuators and Analysts (NACVA) to ensure they're using the best recognized methodology for the business appraisals being performed. Contact us today with any questions or to set up a business appraisal for your company.

Tags: business appraisal, company valuation, company appraisal

Why Should You Get a Company Valuation Before a Merger?

Posted by Business Valuation Specialists LLC on Nov 9, 2015 11:00:00 AM


When you are facing a merger, you must figure out how much the business is worth in objective terms. Getting the valuation of a company can help you to establish a worth for the business so you can proceed with your acquisition or merger with confidence and knowledge. Explore the full benefits of getting a company valuation before an upcoming merger. 

How a Valuation Can Help in a Merger

During a merger two parties who each have different stakes must come together into a new whole. To successfully do this, each party must have an accurate perception of the value of the business. Without this agreement, one party may feel like they have a stronger business than another and are thus entitled to more compensation. They may try to drive their price up to feel like they are coming out of the deal with the compensation they deserve, or undermine the other party with lowball offers. If unresolved, this financial tension can bleed over and affect the working relationships of these parties. 

A business appraiser can review the business history, financial documents, assets and liabilities, and competition to come up with an independent and reliable company valuation. An appraiser can also talk through the valuation with all stakeholders so they fully understand the appraisal report. Appraisers usually specialize in particular areas, so it is important to select a business appraiser who is experienced at valuing companies like yours. 

The merger process can be a tricky one to get right, as it involves bringing different parties with differing stakes to an agreement over company value. When all parties involved in the merger agree on the value of the company, then the entire merger process is easier. 

If you anticipate seeking a merger, yet have not yet identified appropriate parties, an appraisal can help you look for suitable partners and provide them with the information they need to make an actionable decision on the merger process. Having the valuation of a company done ahead of time can actually save you time by helping you weed through interested candidates and decline mergers that are a poor fit. 

When you receive the valuation, you can use it as a starting point for negotiations that will be fair to all parties. Protect your business assets by using a company value as a starting point for negotiations. When you are able to agree on a price for the business, the deal can successfully move into the next phase. 

An appraisal can also help you to bring your expectations in line with reality by showing you an honest valuation of your company. While you can hope to sell your company for well over valuation price, the reality is you may have to settle for an offer that is close to the valuation of even slightly below it. Knowing the value of the company will help you make the decision that is in your best interests. 

Company valuations give a snapshot of the business at a moment in time. Even if you have had a business appraisal done before, it is important to do one before a merger so the value established represents the current worth of the business. If you would like to schedule a business appraisal, we at Business Valuation Specialists would be happy to work with you to value your business. Contact us to learn more or schedule a business valuation. 

Tags: Business Valuation, company valuation