SDI is a big fancy way of saying discretionary cash flow. Basically, SDI are the pretax and pre-interest profits before you take out non-cash expenses, one owner’s benefits, one-time investments and other non-related income or expenses.
Now, that’s a lot so let’s walk through exactly what that means. The first bit of that is all of the money you earn before you consider any interest or amortization that’s due to you, any taxes you need to pay, and any depreciation of your assets like equipment and vehicles.
One owner’s benefits are literally the compensation for you, the owner, and any co-owners you have. The reason we add this compensation back is that the new owner will have to replace your costs in some way, whether it’s hiring another person or running the business himself.
One-time expenses include licensing fees, website design fees and other items that don’t have a recurring billing period.
Non-related income or expenses include money that you may bring in by running your personal consulting income through your business or charging your company rent on a property you own. All of these items will have to be included when selling to another individual.
All of those factors combine to form SDI, which gives you a really good start place to determine the value of a business in question. For you, the SDI helps you look critically at your business and maximize the amount you’re asking. As you start prepping for sale, you can also think carefully about the expenditures and investments you make in your business, as those specific purchases may affect the value. The buyer on the other hand, is able to accurately predict and understand a potential return on investment.
In short, SDI gives all the parties concerned a realistic understanding of the earnings of a business.
In the next post, we’ll take a close look at the second thing that will make the exit from your business a happy, lucrative one.
Confused by all this accounting jargon? RESCON can help decipher it for you. ResCon specializes in preparing your business for sale, getting top dollar and helping that sale to close. It’s our job to protect you from bad actors. Your business is probably worth more than you think it is, meaning you can sell sooner than you think.