Income, Asset, and Market are the three of the more popular approaches used to value a business. This article will focus on the different types of earnings used within the income methodology. Under the income approach, businesses are valued based upon the earnings the company generates. Buyers are most concerned with the amount of income that would be available to them should they acquire the company. The net ordinary income, reported on the profit and loss statements for tax purposes, does not depict the true earnings of the company based on the non-cash, discretionary, & non-recurring items expensed by the business owner. Earnings are intentionally kept low to achieve the goal of mitigating income taxes. Therefore, to determine the true earning capacity of the business, the profit & loss statements need to be re-cast during the valuation process to derive either SDE or EBITDA. Re-casting standardizes (or normalizes) the business earnings through the exclusion of discretionary, non-recurring, and variable items, allowing an accurate and objective comparison to be made between two or more businesses. The business value is then calculated by applying a multiple, consistent with the industry and a weighting of the factors affecting the business, to the SDE … Continue reading Valuing a Small Business – EBITDA Vs SDE