Valuation Formula
SDE = EBITDA + reinstated owner's compensation Enterprise value = SDE x Multiple Equity price = Enterprise value + Inventory - Assumed debt Goodwill = Enterprise value - Equipment value Payback (years) = Equity price / SDE
Finance & Business Plan
SDE = EBITDA + reinstated owner's compensation Enterprise value = SDE x Multiple Equity price = Enterprise value + Inventory - Assumed debt Goodwill = Enterprise value - Equipment value Payback (years) = Equity price / SDE
The most common method for small hospitality businesses is the earnings multiple. You take a normalised earnings figure (EBITDA or SDE) and multiply it by a market multiple to get enterprise value. The multiple reflects the risk and growth of the business and typically falls in a 2.0x-3.0x range for independent venues. From enterprise value you then adjust for inventory and assumed debt to reach the equity price the buyer actually pays.
SDE stands for Seller's Discretionary Earnings. It is EBITDA with the owner's compensation added back, because in an owner-operated venue that salary is discretionary and would be available to a new owner-operator. So SDE = EBITDA + reinstated owner's compensation. Buyers of small, owner-run businesses usually value on SDE; larger or manager-run operations are valued on EBITDA.
Enterprise value is the value of the business operations: SDE multiplied by the multiple. The equity price is what the buyer pays for the shares or the going concern, after adjusting for items that transfer with the deal: add inventory the buyer takes over and subtract any debt the buyer assumes. In the example, enterprise value of 350,000 plus 15,000 inventory minus 50,000 assumed debt gives an equity price of 315,000 euros.
Goodwill is the part of the price not explained by tangible assets, the premium paid for the brand, location, customer base and going-concern value. In the example, enterprise value is 350,000 and equipment is worth 120,000, so goodwill is 230,000 euros. A high goodwill share means you are largely buying reputation and position rather than physical assets, which carries more risk if the concept does not transfer.
The payback period is the equity price divided by annual SDE: how many years of earnings it takes to recover the purchase price. In the example, 315,000 / 140,000 is about 2.25 years. For independent hospitality, paybacks of roughly 2-3 years are common; a much longer payback suggests the multiple paid is high relative to the earnings the business reliably generates.