For the full worked example, including how lenders check coverage and how to read a listing, read the article Does $300K of SDE mean $300K a year in your pocket?
Transcript
Buyers ask me if a business with $300,000 in SDE will pay them $300,000 a year. In some cases it will, in others it won't. Here's why.
SDE is the cash flow before your loan payments. And if you buy a business with bank loans, those payments come out first.
Let's say you borrow $700,000 over 10 years at 10%. That works out to about $111,000 per year in payments. That leaves you with about $189,000, and that has to cover your own pay, your taxes and anything else that breaks in the business.
That's why lenders look at coverage. Under current SBA rules, most acquisitions need a cushion. Your cash flow has to cover the payments at least one and a quarter times.
So when you look at a listing, don't stop at SDE. Run the loan payments first and then see what's actually left for you. If you know someone who's shopping for a business, send this to them.
Thinking about buying or selling a business? Talk with me about selling, or browse the video library.
