CBB CBB Business Operations & Profitability Assessment 1

Question 1

What does 'Seller's Discretionary Earnings' (SDE) represent in a small business context?

Accepted Answer

Pre-tax earnings plus owner's compensation and non-recurring expenses added back

Answer

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?

Accepted Answer

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)

Answer

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?

Accepted Answer

An adjusted income statement that normalizes earnings by adding back owner perks and one-time expenses

Answer

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?

Accepted Answer

It reveals whether the business is growing, stable, or declining, affecting value and saleability

Answer

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?

Accepted Answer

The business retains a large portion of revenue after direct costs, suggesting pricing power or efficient operations

Answer

A high gross margin means the business earns significantly more from sales than it spends on goods sold, indicating strong unit economics.

(CBB) Certified Business Brokers Practice Test