CBB CBB Business Operations & Profitability Assessment 1 — Questions and Answers
Question 1: What does 'Seller's Discretionary Earnings' (SDE) represent in a small business context?
- The seller's personal savings account balance
- Pre-tax earnings plus owner's compensation and non-recurring expenses added back (Correct answer)
- The net income after all taxes and depreciation
- The business's gross revenue before any deductions
Correct answer: Pre-tax earnings plus owner's compensation and non-recurring expenses added back
SDE is the total financial benefit a full-time owner-operator derives from the business, used as the basis for small business valuation.
Question 2: Which metric is most commonly used to value mid-market businesses instead of SDE?
- Gross revenue multiplier
- EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) (Correct answer)
- Net profit margin percentage
- Book value of tangible assets
Correct answer: EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)
EBITDA is the preferred valuation metric for larger businesses because it measures operating performance independent of capital structure.
Question 3: What is a 'recast' financial statement?
- A corrected tax return filed after an audit
- An adjusted income statement that normalizes earnings by adding back owner perks and one-time expenses (Correct answer)
- A bank statement reformatted for loan applications
- A financial forecast prepared for the next five years
Correct answer: An adjusted income statement that normalizes earnings by adding back owner perks and one-time expenses
A recast statement adjusts the business's financials to show true economic earnings, removing personal and non-recurring items.
Question 4: Why is revenue trend analysis important when assessing a business for sale?
- It determines the broker's commission rate
- It reveals whether the business is growing, stable, or declining, affecting value and saleability (Correct answer)
- It identifies the best advertising channels for the listing
- It calculates the business's inventory turnover ratio
Correct answer: It reveals whether the business is growing, stable, or declining, affecting value and saleability
Revenue trends indicate business health and momentum, directly influencing buyer interest and the multiple applied to earnings.
Question 5: What does a high gross margin indicate about a business?
- The business has high employee turnover
- The business retains a large portion of revenue after direct costs, suggesting pricing power or efficient operations (Correct answer)
- The business is spending too much on marketing
- The business has excessive inventory levels
Correct answer: The business retains a large portion of revenue after direct costs, suggesting pricing power or efficient operations
A high gross margin means the business earns significantly more from sales than it spends on goods sold, indicating strong unit economics.
Question 6: Which operational factor can significantly reduce a business's transferability to a new owner?
- The business having multiple product lines
- The business being overly dependent on the seller's personal relationships or specialized skills (Correct answer)
- The business operating in a growing industry
- The business having a documented operations manual
Correct answer: The business being overly dependent on the seller's personal relationships or specialized skills
Owner-dependent businesses are harder to transfer because key relationships or knowledge may not survive the ownership change.
CBB CBB Business Operations & Profitability Assessment 1
What does 'Seller's Discretionary Earnings' (SDE) represent in a small business context?