CBB Business Operations & Profitability Assessment Flashcards

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

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.

Which metric is most commonly used to value mid-market businesses instead of SDE?

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.

What is a 'recast' financial statement?

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.

Why is revenue trend analysis important when assessing a business for sale?

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.

What does a high gross margin indicate about a business?

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.

Which operational factor can significantly reduce a business's transferability to a new owner?

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.