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CHV Group LLC June 2018 Newsletter

CHV Group LLC      |      Buying & Selling     |     Advisory    |       Meet the Team

Terms that Define Value
When valuing the deal and finalizing the deal structure, working capital in many discussions become a tense point. The value is always understood about the exchange of money but financial buyers also are not keen to inject additional working Capital. Here are the key terms to consider in the transaction:

Seller's discretionary earnings (SDE)

A seller’s discretionary earnings are the pretax and pre-interest profits before non-cash expenses, one owner’s benefits, one-time investments, and any non-related income or expenses. In addition, SDI may require that expenses be adjusted if a new owner will necessarily need to take on a new expense.

Seller’s discretionary earnings is a common cash flow-based measure of business earnings for owner-operator managed businesses. To determine the actual SDE, a recast is necessary to arrive at the right SDE.


EBITDA is essentially net income with interest, taxes, depreciation and amortization added back to it. EBITDA can be used to analyze and compare profitability among companies and industries as it eliminates the effects of financing and accounting decisions. EBITDA is often used in valuation ratios and compared to enterprise value and revenue.

EBITDA = Net Profit + Interest +Taxes + Depreciation + Amortization

Both SDE and EBITDA are the basic numbers to value any Business, SDE for owner / operators, while EBITDA is a base for managed Companies. It is not always a question of size as a $ 20 million company may be run by the owner, and a 5-million-dollar company as an enterprise with the owner removed from the day to day operation.

Recasting the Income Statement

To establish the business profitability potential, you may need to make some normalizing adjustments to the income statement. There are a number of items that frequently require adjustment. Read more here.

Strategy or Operational Effectiveness… in the valuation both matter?

While involved in the lower middle market, valuations are often referred to industry standards or multiples, with little in-depth analysis what makes the company sustainable and profitable? While genuine strategy certainly delivers both, we certainly can question that any competitive advantage is sustainable based on operational excellence.

Often companies are obsessed with operational efficiency. by squeezing the operation that is not sustainable or can be easily copied.

One of the key questions in positioning a Company for sale, what are we doing different to our Competition? See Porters Competitive Advantage.
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