Why SDE is NOT Cash Flow | business brokers mergers and acquisitions smb financial statements

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David C Barnett Small Business and Deal Making SME

Күн бұрын

www.BusinessBuyerAdvantage.com
www.HowToSellMyOwnBusiness.com
Learn more at www.DavidCBarnett.com
Related article...
The cash flow is not always the cash flow.
Paul sent in a question about the difference between Net Income, Cash Flow and SDE.
What is the difference and when do we use them?
What danger is there when we don’t understand the numbers?
Many people mess this up and end up working for nothing in their own business.
Watch here: • Why SDE is NOT Cash Fl...
Learn how to buy an already-successful and profitable business even in the covid-recession of 2020 www.BusinessBuyerAdvantage.com
Learn cash flow forecasting and business plan writing at www.BizPlanSchool.com
Learn to sell your business www.HowToSellMyOwnBusiness.com
Book a call with me at www.clarity.fm/davidbarnett
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business brokers mergers and acquisitions smb buy a business investing financial statements cash flow statement

Пікірлер: 91

@pattymatthews8108 2 жыл бұрын

It is really helpful to see each of these side by side. Thank you! You always explain things in a way that is easy to understand.

@DavidCBarnett 2 жыл бұрын

Glad it was helpful Patty!

@stevennatera 11 ай бұрын

This video was a gold mine crash course, as I start my small business acquisition journey. Thank you!!!!

@DavidCBarnett 11 ай бұрын

Thanks Steve

@bzigila 6 ай бұрын

This one killed it for me!...... thank you David!

@DavidCBarnett 6 ай бұрын

Thanks b. This fools a lot of folks.

@mitchmurray8314 2 жыл бұрын

Wow! - straight to the point, plain talk, and really, really simple to understand. Thx u

@DavidCBarnett 2 жыл бұрын

These are my goals everyday, glad you're finding these useful. Cheers.

@canuck81 Жыл бұрын

You made this so easy to understand. I always had trouble understanding cashflow. It all makes perfect sense now. Thank you! Subscribed immediately!

@DavidCBarnett Жыл бұрын

Thanks, glad to help.

@MrOofmaster Жыл бұрын

This was extremely helpful, thank you! Breaking the calculations into separate steps made it so easy to follow.

@DavidCBarnett Жыл бұрын

Glad it was helpful Creed.

@lydiapatelll Жыл бұрын

I searched for SDE and found this- super helpful!

@DavidCBarnett Жыл бұрын

Yes, so many people are confused by these terms. This is one of my most popular videos.

@tmac4jesus 2 жыл бұрын

That was just what I needed! Thanks

@DavidCBarnett 2 жыл бұрын

Glad I could help!

@aaronwestbury6345 Жыл бұрын

The best explanation I’ve seen yet! Thanks

@DavidCBarnett Жыл бұрын

Wow, thanks Aaron!

@Buzinessbae 5 ай бұрын

Thank u this was super helpful!! Just what I was looking for!

@DavidCBarnett 5 ай бұрын

You're welcome

@lackbohrmaschin6770 2 жыл бұрын

Really great video, it was very helpful !!!

@DavidCBarnett 2 жыл бұрын

Thanks Lack.

@TimePass-op2ys Жыл бұрын

Thanks! Great information ...Subscribed

@DavidCBarnett Жыл бұрын

Thanks for the sub!

@DigitalGrowthTree Жыл бұрын

Lovely. David you are an awesome tutor!

@DavidCBarnett Жыл бұрын

Thank you kindly!

@michaelwhitaker3865 Жыл бұрын

Finally… a truly helpful video. Thank you

@DavidCBarnett Жыл бұрын

The channel is full of them.. check it out. Thanks.

@SteveN-zb3rn Жыл бұрын

David, this is extremely helpful and the best explanation on net

@DavidCBarnett 11 ай бұрын

Thanks Steve

@user-zo1tb9pv2d Жыл бұрын

Very Informative and clear.

@DavidCBarnett Жыл бұрын

Thanks for watching.

@kalaniking4517 4 ай бұрын

Thank you!

@DavidCBarnett 4 ай бұрын

You're welcome!

@LaredoHandyman 7 ай бұрын

Great simple explanation!

@DavidCBarnett 7 ай бұрын

Glad it was helpful!

@rudramukherji6958 11 ай бұрын

Awesome video...as always.

@DavidCBarnett 11 ай бұрын

Thanks

@jmey Жыл бұрын

Super simple in the best way

@DavidCBarnett Жыл бұрын

Glad you liked it

@cbdbotanicaltherapy Жыл бұрын

Very helpful.

@DavidCBarnett Жыл бұрын

Glad it was helpful!

@kensing1 Жыл бұрын

Simply Excellent 👍🏾

@DavidCBarnett Жыл бұрын

Much appreciated

@welshmin1286 Жыл бұрын

This is the clearest explanation I've ever seen. Which should we use when valuing a business to buy? Net income?

@DavidCBarnett Жыл бұрын

Small businesses are valued based on SDE. That's why it exists, it's the most 'common' denominator that can be applied across businesses. Just don't confuse it with money that ends up in your pocket.

@welshmin1286 Жыл бұрын

@@DavidCBarnett thank you for your reply, I think that is what is throwing me off, understanding the difference between sde and what will then end up in my pocket. Thank you for the clarification

@YuhannesWatts Жыл бұрын

Aweseome vid

@DavidCBarnett Жыл бұрын

Glad you find it helpful.

@NoahFlemingConsulting 2 жыл бұрын

That was excellent.

@DavidCBarnett 2 жыл бұрын

Thanks Noah

@ChristianPierreW 2 ай бұрын

Good video

@DavidCBarnett 2 ай бұрын

Glad you enjoyed

@tianwu8936 Жыл бұрын

Thanks David. Really helpful! I'm looking at a small business and the SDE is more than $200k while the net income is just $50k. In the add-backs, the broker included many items such as "COGS (personal)", "meal and entertainment", "cash (not reflected in books)" etc. Does it just mean these are all personal items? I'm really confused by the personal COGS and the cash...

@DavidCBarnett Жыл бұрын

I've just recorded a video answering this question... watch for it in September.

@davidmfabian1137 12 күн бұрын

Anyone know the answer: If the Net Earnings are $85.942.34 then how does the owner pull out a $100,000 Owner's Salary? Where does it come from?

@DavidCBarnett 8 күн бұрын

Net earnings is not cash flow either. Things like depreciation are not cash expenses. Also, cash collected in earlier periods could be taken out at owner's salary in later periods. It's why you need to be looking at balance sheets as well as income statements.

@mazenbeatty8755 9 ай бұрын

Great video! At 5.20 you mentioned that the principle portion of the loan replayment is not represented as net income. Does that mean that the end of the day the income required to make payment of the principle portion is taxed? I hope that question makes sense

@DavidCBarnett 9 ай бұрын

Yes. it does. Yes, it is. People don't often get it but when you take a bank loan, you don't get taxed on that money, so, when you pay it back, it's also a non-taxation thing. The money you earn to make the principle payment is taxable income. People get themselves trapped by this all the time with short amortization loans. They give all their cash to the lender, then have none to pay the taxes they owe.

@ryantunison5433 2 жыл бұрын

David, which column would you add back owners “benefits”?

@DavidCBarnett 2 жыл бұрын

Those are added back in all instances for most small deals. I didn't touch on that in this video.

@guytavis7911 2 жыл бұрын

Very good VDO, one question here, why SDE is not 100K + 85,942 + 8,000, since interest,tax are things we need to pay ( not belong to owner )

@DavidCBarnett 2 жыл бұрын

Because the level of interest and taxes are 'discretionary.' They are only there based on how the current owner runs the company. For example, you might have more or cheaper debt meaning your interest expense would be different. Also, if you chose to issue a big bonus to yourself, your own taxes would go up, but the company taxes would go down (if this is a corporation) meaning that the tax bill is actually under the control of the owner. We go back to SDE and then as a buyer, you need to figure out your own interest, capex, and tax situation when you forecast how you will be able to live and service debt once you're the owner. Hope this helps.

@1realtruthrightnow742 Жыл бұрын

David, I bought your BBA course and was gong to email these questions you but figured some other ppl may have the same question. I'm actively looking at two business's right now. Two Question's: Q1) When looking at the financials I'm being sent for review, is owner cash flow the same as seller discretionary earnings? Q2) Is the owner cash flow or seller discretionary earnings SDE figures, after the Owner's salary and all expenses? Looking forward to your replay. Thank you.

@DavidCBarnett Жыл бұрын

Q1= Usually, yes. Q2= It's after all expenses but before the owner's salary. Definition of SDE is the total amount of money available to an owner who works full time in the business. Out of this money, the owner has to satisfy 5 things: 1. their pay, 2. debt service 3. taxes 4. replace machinery and equipment 5. get a return on the cash they put down. Hope this helps.

@1realtruthrightnow742 Жыл бұрын

@@DavidCBarnett I helped immensely. Thank you for your speedy reply and clearing that up for me.

@wayneo7220 14 күн бұрын

Was there a multiple applied to the SDE to determine a sale price? I saw a newer video where you referred to a 2.0-2.2 multiple, I thought it pertained to SDE but might be wrong.

@DavidCBarnett 8 күн бұрын

This video talks about cash flow. not valuation.

@michyan82 3 ай бұрын

I'm late to this one watching on 4/9/2024 - I thought net profit has the same definition as net earnings and both have taxes subtracted in their calculations? Hard to distinguish the nuances of these terms because they seem to sometimes be used interchangeably. Thanks and I love your content!

@DavidCBarnett 3 ай бұрын

In my mind net income and net earnings are the same. But, this is why you sometimes need to ask when looking at a presentation about any business. Many use their own definitions that don't align with what you think.

@danackley1568 Жыл бұрын

Hi David, A Biz with $18m gross $1.8 EBITDA. Is that considered a large business and is there a big differences . Do you explain it in your class?

@DavidCBarnett Жыл бұрын

The 'classification' of businesses is different based on who you're talking to. In my world, this would be a mid-market business, not a small one. To a Harvard professor, this example is a small business. It's why you always have to calibrate for the content you're consuming. ie the book HBR Guide to Buying a Small Business is about businesses this size.

@nishantshastri2837 Жыл бұрын

👌🙏

@DavidCBarnett Жыл бұрын

Enjoy!

@umarb3422 3 ай бұрын

Is that why they say cash flow is king?

@DavidCBarnett 2 ай бұрын

They say 'Cash is king' because if you have cash you can buy your way out of problems.

@sechuan Жыл бұрын

im confused how accounts payable going up causes cash to go up. wouldnt that mean we have to pay more?

@DavidCBarnett Жыл бұрын

Accounts payable is unpaid bills. If you don't pay your bills, your cash is increasing. You owe more. When you pay the bills, the A/P goes down and the cash as well. Get it?

@brianjohnson8425 2 жыл бұрын

Based on this example, what would you pay for this company?

@DavidCBarnett 2 жыл бұрын

Thanks Brian, Depends on the industry. For example, if it were a restaruant or nightclub it might be worth $300K, if it was a machine shop with a lot of equipment it could be around $500-$550K. Ultimately, the buyer needs to work out a cash flow forecast to see if the debt service makes sense while leaving enough cash for them to take home and to cover 'wiggle room' if sales should decline. The more 'stuff' in the business the easier it is to finance longer term and the more of a 'plan b' that exists if things should go wrong. ie, more value if you closed and liquidated means people are usually willing to pay more. If you want to get into the weeds of cash flow forecasting, check out www.BizPlanSchool.com

@joshmoore7304 Жыл бұрын

Doesn't SDE differ from adjusted EBITDA in that adjusted EBITDA adds back excess owner's salary whereas SDE adds back the full owner's salary?

@DavidCBarnett Жыл бұрын

Adjusted EBITDA assumes a manager is being paid a fair market salary for running the business. So, yes, your thinking is correct. Normally, we add back the full owner salary to get SDE, then use a FMV salary to get to EBITDA.

@joshmoore7304 Жыл бұрын

@@DavidCBarnett Thanks! Love the content.

@RS-uy9pq 2 жыл бұрын

Buying a business this small is for scavengers. The amount headache after completion of a deal like this is not worth it. I am aware that headache comes with the purchase of any business, however the juice must be worth the squeeze. With small enterprises like this if you sneeze you are out of business. I wrestle with the fact that people buy businesses that have no clear management structure in place. A business with no management, and processes in place automatically makes that business not operationally sound. In my mind, this creates an astronomical devaluation of the company.

@DavidCBarnett 2 жыл бұрын

Everything you say is true. That's why they sell for such low valuations vs. mid-market and other larger and more 'organized' businesses. Some of my other videos address how many buyers of these businesses actually are the ones who bring the skills to 'organize' it better and this is what allows growth and ergo an enhancement of the value and cash flow.

@bouchechhamdi816 4 ай бұрын

Unless you are a large company that master tax evasion, you should never ever add the tax to your net profit. This is why EBIDTA or SDE ( which includes EBIDTA) is a very dangerous metric. In my humble opinion, especially for small to medium sized company, Cach flow + owner salaries = lets call it reduced SDE, is the best metric to evaluate a companies performance for you as a buyer. Personally however, i will never add the owner salary, and just use the cash flow as the sole metric.

@DavidCBarnett 4 ай бұрын

The reason taxes are added back is because they can be moved up or down because of management decisions about things like salaries, bonuses or depreciation elections. Taxes can be fluid in this way. I think it's best to add them back, then calculate your own tax burden when you do the buyer's cash flow forecast. Especially if you're going to be operating under a different kind of business structure or a different jurisdiction, etc.

@RomilCPatel 2 жыл бұрын

Why don’t business brokers just value a business with a multiple of forward in unleveraged FCF rather than a multiple of past SDE? For example try and find the unlevered FCF ten years out, discount it with WACC, and add a multiple on it. This way all CAPEX, taxes, growth, and owners salary over the next ten years is taken into account, rather than with SDE where it isn’t. Since businesses usually sell cash free-debt free or in an asset deal the debt shouldn’t be taken into account and if the buyer plans on using debt they can just subtract that amount and come up with levered FCF. Why in your experience isn’t this the industry standard, as it makes more sense to me than using past SDE and multiples on that to value businesses, or am I getting something wrong?

@DavidCBarnett 2 жыл бұрын

Because when you buy a small business you become responsible for the leadership and management. Discounting future cash flows is used for bigger businesses with a management team in place that sticks around. In the smallbiz space, buyers ask, 'how much money do I have access to if I buy this business and run it?' If they hire a manager, it's easy to adjust to normalized EBITDA.

@gavnonadoroge3092 Жыл бұрын

so sde is a sales gimmick to make it seem like business is making more $ than it actually is?

@DavidCBarnett Жыл бұрын

I'm doing a 45 minute talk on this topic for the BossUp conference later this month, you should come, it's free.. hopin.com/events/bossup-virtual-micro-m-a-conference