What’s the difference when Buying or Selling a Business: EBITDA vs Seller's Discretionary Earnings?

Which Metric do Buyers use when assessing the Purchase of a Business? In this example, we will use a Medical Clinic. The answer to that question is that it depends on the size of the Business and the buyer. Individual Buyers are willing to look at SDE while Private Equity Groups, Family Offices, Larger Groups seeking Strategic Acquisitions are looking for EBITDA.

First let’s define EBITDA, Earnings before Interest, Taxes, Depreciation, and Amortization. The way to Calculate this is to simply add those items from the financial statements. This method assumes a “Passive” (not working in the business) owner and investor for example.

SDE is the acronym for Sellers Discretionary Earnings, AKA Sellers Discretionary Cash Flow, Adjusted Net and a few other similar sounding names. This Metric includes all of the EBITDA items listed above but also Assumes a Full-Time working owner and includes the normalized, replacement cost for Seller's Salary, (this is Discretionary as different owners can take larger or small salaries vs net profits), Seller’s Discretionary Expenses “add backs”. Examples might be Travel that is not necessary for the business, a company car (the difference of a $100k pickup truck when a $40k work truck would be sufficient), a retirement plan for the owner of the business just to name a few.

An individual Doctor looking to buy a Medical Practice to work in and own will be looking at SDE to calculate how much they will make taking over the Seller’s duties. An example would be an Internal Medicine Practice with $800k in Gross Revenues and the Full-Time working Doctor owner is making $350k after all the bills are paid. A buyer might pay 1 to 2.5 times (maybe more) of the SDE to purchase that practice.

A Large Group or Hospital looking to buy this same Practice will be a somewhat passive investor and will include a Doctor's Salary of $250k+ in the expenses. They will also add general and administrative cost and where the SDE was $350k in this example, the EBITDA is now around $100k for the same Business. With the owner Doctor leaving, they will also want the seller to “earn out” of the business for the risk that the patients don’t like the new Doctor they place in the Practice. This means that if the Gross Revenues decrease after the sale, the seller receives less money for the business. The large group may pay 2 to 3 times (could be more for a Business that has $1mm+ in EBITDA) the EBITDA but the higher Multiple is on a much smaller Number. 3 Times EBITDA of $100k in this example equals $300k price where 1.5 times SDE of $350k equals a price of $525k.

Keep in mind this is the Same Business, Same Numbers, just a different point of view from different types of buyers. The Bottom Line is that your Business has a different value to different types of buyers.

You need a Broker that can help you find the best buyer to get the best price for your Business when it is time to sell. If you are thinking about selling a business or Medical Practice and are not happy with the offers you have received from large group buyers, call us at (813) 690-0109 for a free confidential consultation about buying or selling your Business or email Broker@EnterpriseBrokers.com