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Old July 27, 2021, 10:47 AM
GordonJ's Avatar
GordonJ GordonJ is offline
Join Date: Aug 2006
Location: West Palm Beach, FL
Posts: 3,027
Default Using the cow's milk, to pay for the cow. The SDE and owner financing.

Maybe you know I have a Real Estate background, actually went to college to study it. Got my GRI designation (Graduate Realtor Institute), worked in the field, specialized in commercial and business.

Hated it.

Quit. Made more money singing off key telegrams.

Anyhow, I've been consulting with some local businesses who are selling, and a few of them are considering doing their own financing. It has pros and cons.

Biggest pro is, the owner can often get more overall for the business than if a cash transaction (loans).

Also, tax and estate benefits.

Downside, mainly, the new owner runs the biz into the ground, POOF, there goes everything.

Normally, it is done when a buyer either can't get a traditional loan or doesn't have a big enough down payment.

Anyhow, it is a pretty standard way of selling and buying a business and it is estimated that as many as 20% of businesses are bought and sold this way.

Enter the SDE, which stands for Seller's Discretionary Earnings, or in very vague, rough layman terms, the Net Profit or take home.

Several ways to do business evaluations, but the SDE is a quick glance way to see if the business has the potential and profits one is seeking.

It is a figure which allows an ABSENTEE owner to add an asset, which creates more leverage, or gives a cash flow. Another type of evaluation is the EBITDA, has more detail, but basically spits out Gross Profit, it differs mainly because a small momma/poppa biz builds in benefits, for example, maybe a car/van allowance, where a corporation would have those as expenses.

This NOT intended to be a lesson, just an the point>>>>

Spend a few minutes a day shopping for businesses for sale in your region, see if they post up SDE/EBITDA or simply say CASH FLOW, which is not a good way to do a valuation, but the de facto term used by brokers. Cash flow seldom means anything, it has to be listed with all income, expenses and can get very deceptive.

A biz with an SDE of around 180 to 220k, could be a great take over opportunity. Most of these are small family types of locale biz, like an Independent gas station/convenient store. You will often find quality managers, whom you can offer a much higher salary to, and let it run on auto-pilot (sort of).

The bigger the business, and over 3 to 5 Million, a broker, or owner may offer a FINDER'S FEE. Which is why I suggest you get to know your local area.

Many small mfgr and supply companies can be owned from afar with a good management team in place. A sale of a 5 million dollar business, could get you a 10 to 25k FINDER'S FEE.

It has always existed, just hard to find real life information about how to do it. But since we're talking about above the fray thinking here, consider getting a business and paying for it with the profits while building up assets and worth.


P.S. Since I'm in the mood, if you have any real estate, biz buying/takeover or finder's fee questions, now would be a good time to post them up, I am known as a moody kind of guy, so may not be so willing to share in the future, fair enough?

Last edited by GordonJ : July 27, 2021 at 11:29 AM.
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