To understand Owner Benefit Valuation, one first needs to understand SDE – Seller Discretionary Earnings. SDE is modified Net Income. It takes into account all the expenses a small (under 300 employees according to SBA) business owner runs through the company, which are not expenses truly related to the business operations. For instance, if Auto Expense is $10,000 per year, $5,000 may be related to a personal auto not used for the business. So we would add $5,000 to the Net Income to arrive at the SDE. In addition to adding non-business expenses, we also add non-cash expenses like Depreciation, Amortization and Interest to Net Income, as they are only used for accounting reasons and not to establish cash flow. In the end, this SDE, or otherwise called Owner Benefit, results in a true picture of how much the owner is actually taking out of the business.
To perform an Owner Benefit Valuation, we take the SDE and multiply it by a multiple that represents the risk/reward structure of the business. The lower the multiple, the higher the potential risk and lower reward. For instance, a restaurant is a very risky business as we all know. The multiple in this industry is usually 1.5 to 2.25X. But a manufacturing company with a unique, patented product with hundreds of medium-sized clients would yield a 7 to 15X multiple.