April’s Company Challenge
Annual Revenues: $2,262,000
Seller’s Discretionary Earnings (SDE): $ 319,980
Earnings before Interest, Taxes, Deprc., & Amort. (EBITDA): $ 272,980
The analysis consisted of valuing a hardware store founded on January 1, 1932, owned by the current owner for 15 years, and converted to an S-Corporation Ace hardware franchise on February 1, 2004. Naturally, the store has an extremely long and loyal customer base within the community. It is also a very stable picture financially with revenues over $2.1M generating good profits after fixed cost recognition. A current senior employee and prospective buyer acquired two shares of stock in July 2018. The owner receives an annual stipend plus all bottom-line profits.
Revenues have been extremely stable for the last 4 years. Earnings have been less stable with a drop in the last two years, but last year was their best ever in terms of revenues but especially earnings, doubtless due to the surge in home improvement from COVID lifestyle changes. Average 4-year Revenue, SDE and EBITDA are $2,082,400, $211,155, and $166,992, respectively. With revenues so stable, good efficiencies have been achieved recently.
The owner has consistently earned $90,000 and with a transition, expectations of an additional payroll reduction of $15,000/year are reflected in the cash flows. How much should the key employee/prospective buyer offer the owner?
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Explanation of Value: Rosetta Valuations put this one at $756,000. This was quite typical as they showed very stable revenues and a long history. Last year’s Price/SDE multiple was 2.33. Before computers, every business was simply valued at 2.3 times SDE!