Most entrepreneurs don’t consider exit planning until the moment they are ready to exit. Then, it’s often too late. You are burnt out and ready to exit – NOW. That leads you to leave money on the table when making a deal, which is precisely what you don’t want to do.
Joe Valley, author of The EXITpreneur’s Playbook has spent years helping entrepreneurs prepare for their ideal exit. We had a chance to interview him and discuss some of the information in the book. While it’s by no means a complete overview of the book, we discussed some of the aspects that hit home while reading it.
Are You Fielding Offers from Aggregators? Know Your SDE.
If you are like most Amazon business owners, you are fielding offers all of the time. You have snail mail offers and email offers. It’s overwhelming and annoying. You are just trying to grow your business – maybe you’ll want to exit in six months, a year, or a year and a half. But that’s not your focus right now.
While you don’t have to respond to any aggregator offers right now, a big part of exit planning – which means planning a future exit – is understanding your Seller’s Discretionary Earnings or SDE.
Getting a handle on this right now will make it easier for you to plan for an exit in the future. Here’s a brief breakdown on calculating your SDE – and why it’s crucial for exit planning.
First of all, SDE is a calculation of the financial benefit that you would derive from your business annually. It’s a math equation.
Many owners/operators would pull up a profit and loss statement, look at the net income, and then add their salary back. That will give you a general idea of the business’s worth. However, when considering the total value of your business to a buyer, you have to think about all of the one-time purchases you made in the year. Did you attend a conference? Buy a laptop or a new phone? Did you pay a one-time licensing fee for your product?
Those are all expenses that you can add back to the value of the company. The buyer will not need to make those purchases again.
If you’re considering selling to an aggregator, the add-backs can get more extensive. For example, if you pay for a SaaS, the aggregator/buyer will likely pay for the same software or have their own. That means the SaaS cost is an add back when considering an aggregator offer – but this may not be the case when it comes to an individual buyer.
On the other hand, consider any permanent savings you have negotiated for your company. If you recently got a price cut on your product – say $1/per item – that savings should be included in the company’s total value. It may not be reflected for the entire year’s profits, because you only recently got the price reduced. However, your savvy negotiations will save you and the future buyer money, so the company value should include the savings.
Do you see why calculating SDE can leave many owner operator’s head’s spinning?
This is why we recommend talking with a consultant in advance of your exit – before you begin to consider accepting a purchase offer. You need to understand your SDE and know your company’s worth.
If you aren’t ready to talk to a consultant, The EXITpreneur’s Playbook, is a great place to start.