SDE base different for ValuSource Market Comps and Bizcomps
The primary reason is the definitions are different. ValuSource Market Comps defines it as “Annual earnings before owners’ compensation expense, interest expense, and income tax expense.” Bizcomps defines it as “Net profit before taxes and any compensation to owner, plus Amortization, Depreciation, Interest, Other Non-Cash Expense and Non-Business Related Expense. Normally to one working owner.” you can see the primary difference is Depreciation.
In the market method, it is interesting to note that the way the base is calculated is not relevant to the pricing of the company. What is important is that the same base applied to the multiplier is the same base as what is calculated for the subject company. Furthermore, the valuation analyst must subjectively determine which base is the most comparable. In this case, the SDE represents the take home to a working owner. It ignores the efficiency that the population uses to generate that SDE. For instance, a company with $8 in revenue and it costs $6 to generate SDE of $2 (less efficiency) has the same base as a company with $3 in revenue and it only costs $1 to generate SDE of $2(more efficiency). However, both companies have a SDE of $2 and that makes them comparable.