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Seller of a dog grooming/boarding business has added back the manager's salary to the net earnings of business

Net earnings (EBIT) after managers salary is $40,000/yr. The seller has based the price on a profit of $82,000 which is $40,000 plus the manager's salary of $42,000. This times a multiplier of 1.71 resulted in a sale price of $140,000. I will not be managing the shop so I will continued to pay the manager's salary. Should the price be $40,000 x 1.71 multiplier = $68,400??

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We are financial consultants to a group of investors whom we have their consent to manage their funds which is in our custody for cooperation in joint venture business investments.

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Jul 5, 2017
Kathlene Thiel, MBA, CVA, CBI
ThielGroup LLC.
Albany County, NY

If the seller is removing their salary, it is not EBIT. It would be Seller Discretionary Earnings (SDE). The rule of thumb for a Pet Grooming company is 1.5 times SDE plus inventory (2016 Business Reference Guide). If the SDE is 82,000 then a price of $123,000 plus inventory would be indicated. A quick check of comparable sales over the last five years would seem to back up this multiple.

Jul 8, 2016
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The BAF Group LLC

The selling price of any business is only worth what you (the Buyer) believes it is worth. So, there is no right or wrong - but there is a real matter of whether it makes financial sense, or not.

In getting an SBA loan, the bank would ask for the Manager's Salary to be added back into the Expenses. If you were operating that same business yourself, the bank would ask you for a Personal Financial Statement, where you would have to disclose all of your required financial commitments: Rent or House Payment, Car Payment, Credit Card obligations, Utility Bills, etc. They would then total that amount and it would replace the Manager's Salary line. The new Net Cash Flow or Net Income after the deduction of your Salary would then be what the bank and SBA would consider as a fair pricing model. Either way, the management of the operation has to be accounted for, in a financial manner.

So, the long way around answering you is summarized by saying, yes; as a Business Broker and someone who deals with SBA loans all of the time, the Manager's Salary should not be added back into the Expenses.

Jul 7, 2016

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