Buy/Sell Side Articles

Business brokerage and mergers and acquisitions (M&A) are both methods for buying or selling a business, but they differ in several key ways.

Business brokerage typically involves the sale of smaller, privately-held businesses that are not publicly traded. Business brokers typically work with businesses that have annual revenues of less than $10 million and sell for less than $5 million. The process usually involves marketing the business for sale, identifying potential buyers, negotiating the terms of the sale, and helping with due diligence and other closing activities.

In contrast, M&A transactions usually involve larger businesses with annual revenues of $50 million or more, and typically involve the purchase of a controlling interest in a publicly traded company or the merger of two or more companies. The M&A process is often more complex and involves more parties, such as investment bankers, lawyers, and accountants. The transaction may involve a stock sale, asset sale, or merger of equals, and may require regulatory approvals or other legal filings.

Another key difference between business brokerage and M&A is the level of involvement of the buyer and seller. In a business brokerage transaction, the buyer and seller are typically more involved in the negotiation and due diligence process, whereas in an M&A transaction, the process is often more formal and structured, with more professional advisers involved in the negotiation and closing of the deal.

Finally, the valuation of a business may differ between business brokerage and M&A transactions. In a business brokerage transaction, the value of the business may be based on factors such as the business's revenue, profitability, and growth potential, as well as market conditions and other factors. In an M&A transaction, the valuation may be based on more complex financial metrics, such as earnings before interest, taxes, depreciation, and amortization (EBITDA), as well as projections of future earnings and cash flow.

In summary, while both business brokerage and M&A involve the buying and selling of businesses, they differ in terms of the size of the businesses involved, the complexity of the transactions, the involvement of professional advisers, and the valuation methods used.

Mergers and acquisitions (M&A) transactions can be categorized based on the size of the companies involved. The size of a company is typically measured by its annual revenue, and different M&A transaction types can be used depending on the size of the companies involved.

The various levels of M&A transaction types by company revenue include:

1. Small business M&A: This type of M&A transaction also known as "Business Brokerage" or "Main Street Business Brokerage" involves small businesses with annual revenues of less than $5 million.

2. Micro-cap M&A: This type of M&A transaction involves small companies with annual revenues of less than $50 million.

3. Lower middle market M&A: This type of M&A transaction involves companies with annual revenues of between $50 million and $100 million.

4. Middle market M&A: This type of M&A transaction involves mid-sized companies with annual revenues of between $100 million and $1 billion.

5. Large-cap M&A: This type of M&A transaction involves large companies with annual revenues of more than $1 billion.

6. Mega-deals: This type of M&A transaction involves extremely large companies with annual revenues of more than $10 billion.

Seller Discretionary Earnings (SDE) is a financial metric used in business valuation to determine the total economic benefit or income generated by a small business or closely held company. SDE represents the pre-tax earnings generated by a business that are available to the owner or seller of the business for discretionary purposes, such as paying themselves a salary, taking vacations, or investing in the business.

SDE is calculated by taking the business's net income and adding back any non-cash expenses, interest, taxes, depreciation, and amortization, as well as any owner benefits, such as owner salaries, benefits, or perks. The resulting number represents the cash flow generated by the business that is available to the owner.

SDE is commonly used as a valuation multiple for small businesses, particularly in industries where owner involvement is high, such as in family-owned businesses or small professional service firms. A multiple of SDE is often used to arrive at an estimated value for the business. However, SDE is just one of several factors that can be used in business valuation, and other factors such as market conditions, growth potential, and industry trends should also be considered.

Here's an example of how to calculate SDE:

Let's say you're looking to buy a small business that generates $500,000 in annual revenue. The business has $100,000 in expenses, including rent, utilities, and other operating costs. The owner pays themselves a salary of $75,000 per year and takes an additional $25,000 in benefits, such as health insurance and retirement contributions. The business has no debt and doesn't pay any interest.

To calculate SDE, you would start with the business's net income, which is calculated as follows:

Net Income = Revenue - Expenses

Net Income = $500,000 - $100,000

Net Income = $400,000

Next, you would add back any non-cash expenses, interest, taxes, depreciation, and amortization, as well as any owner benefits. In this case, there are no non-cash expenses, interest, taxes, depreciation, or amortization, but there are owner benefits that need to be added back. So, the SDE calculation would look like this:

SDE = Net Income + Owner Benefits

SDE = $400,000 + $75,000 + $25,000

SDE = $500,000

So, in this example, the SDE for the business is $500,000. This represents the pre-tax earnings generated by the business that are available to the owner for discretionary purposes, such as paying themselves a salary, taking vacations, or investing in the business. This SDE number could be used as a multiple in a business valuation to determine an estimated value for the business.

SDE (Seller Discretionary Earnings) and EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) are both financial metrics used in business valuation. While the two calculations are similar in some respects, there are some key differences between them.

One of the main differences between SDE and EBITDA is that SDE is typically used to value small businesses, while EBITDA is more commonly used to value larger businesses. This is because EBITDA is a more standardized metric that is commonly used in financial reporting, whereas SDE is a more flexible metric that is tailored to the unique circumstances of small businesses.

Another difference between SDE and EBITDA is that SDE takes into account the owner's salary and other discretionary expenses, whereas EBITDA does not. SDE is designed to reflect the true economic benefit of a small business to the owner, while EBITDA is designed to represent the earnings of the business before certain expenses are taken into account.

To illustrate the difference between SDE and EBITDA, consider the following example:

A small retail store generates $500,000 in annual revenue and has $200,000 in expenses, including rent, utilities, and other operating costs. The owner pays themselves a salary of $100,000 per year and takes an additional $50,000 in benefits, such as health insurance and retirement contributions.

To calculate SDE, we would start with the business's net income:

Net Income = Revenue - Expenses

Net Income = $500,000 - $200,000

Net Income = $300,000

Next, we would add back any non-cash expenses, interest, taxes, depreciation, and amortization, as well as any owner benefits:

SDE = Net Income + Owner Benefits

SDE = $300,000 + $100,000 + $50,000

SDE = $450,000

So, in this example, the SDE for the business is $450,000, which represents the cash flow generated by the business that is available to the owner for discretionary purposes.

To calculate EBITDA for the same business, we would start with the net income and add back any interest, taxes, depreciation, and amortization:

EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization

EBITDA = $300,000 + 0 + 0 + 0 + 0

EBITDA = $300,000

As you can see, the calculation of EBITDA does not take into account the owner's salary or other discretionary expenses, whereas SDE does. This is one of the main differences between the two metrics, and highlights the importance of using the appropriate metric for the context of the business being valued.

Yes, SDE (Seller Discretionary Earnings) takes into consideration the owner's payroll or salary. In fact, owner's payroll or salary is one of the key components of SDE.

SDE represents the total economic benefit or income generated by a small business or closely held company that is available to the owner or seller of the business for discretionary purposes. In other words, SDE represents the cash flow generated by the business that is available to the owner after all expenses have been paid, including the owner's salary or payroll.

When calculating SDE, the owner's salary or payroll is typically added back to the net income of the business, along with other owner benefits such as health insurance, retirement contributions, and other discretionary expenses. This is because these expenses are considered discretionary and may vary from owner to owner. By adding them back to the net income, the calculation of SDE provides a more accurate representation of the true economic benefit of the business to the owner.