A BVR Special Report
Excerpt from
Benchmarking Seller’s
Discretionary Earnings
in a Small Business
Based on data from Pratt’s Stats
What It’s Worth
Benchmarking Seller’s
Discretionary Earnings
in a Small Business
Based on data from Pratt’s Stats
A BVR SPECIAL REPORT
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Editor: Jan Davis
Publisher: Sarah Andersen
Managing Editor: Janice Prescott
Chair and CEO: David Foster
President: Lucretia Lyons
Vice President of Sales: Lexie Gross
Customer Service Manager: Retta Dodge
ISBN: 978-1-62150-054-4
Library of Congress Control Number: 2015941692
Table of Contents
Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Methodology. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Industry Groups . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
All Industries (SIC 0111-9999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Agriculture, Forestry, and Fishing (SIC 0111-0971). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Construction (SIC 1011-1411) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Manufacturing (SIC 2011-3999). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Transportation, Communications, Electric, Gas, and Sanitary Services (SIC 4011-4971). . . . . . . . . . . . 22
Wholesale Trade (SIC 5012-5199) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Retail Trade (SIC 5211-5999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Finance, Insurance, and Real Estate (SIC 6011-6799). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Services (SIC 7011-8999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Food Stores (SIC 54) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Real Estate (SIC 65) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Personal Services (SIC 72) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Business Services (SIC 73). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Automotive Repair, Services, and Parking (SIC 75) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Health Services (SIC 80) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Lawn and Garden Services (SIC 0782). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Restaurants (SIC 5812) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Bars and Drinking Places (SIC 5813). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Real Estate Agents and Managers (SIC 6531). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Beauty Shops (SIC 7231). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Business Services, Not Elsewhere Classified (SIC 7389). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .54
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3
Executive Summary
Seller’s discretionary earnings (SDE), a common cash flow-based measure of business earnings for the owner-operator
managed business, is an integral figure in small-businesses transaction data. For a small-business appraiser, it represents an important financial metric to value a business. For a business intermediary, it is a crucial figure used to
price and list a business for sale. For the owner-operator of a small business, it represents a measure of earnings that
an owner is achieving, and this figure can serve as benchmark indicator for other companies in the same industry.
What all these groups share is that this information is crucial, and real-world data from small private-business sales
is of high value.
In this special report, we use a database of over 23,000 business transactions to analyze sold private businesses and
look at companies based on their size and industry. Our analysis consists of the following:
• Discretionary earnings to revenue;
• Selling price to discretionary earnings; and
• Profit margins.
For size, we organize the companies into descending order based on revenues and create five groups of equal counts
(quintiles). While some variations exist among the different industries, several common relationships appear within
the data.
As revenues increase, the absolute amount (the dollar amount) of SDE tends to increase, while SDE as a percentage of
revenue tends to decline. Said inversely, discretionary earnings for smaller businesses tend to be a lower dollar figure,
but a higher percentage of revenues. Exhibits 1 and 2 show that companies in the quintile with the largest revenues
have a median SDE value of $345,933, while those in the middle quintile have a median SDE figure of $87,376, and
those in the smallest quintile have a value of $36,925. Exhibits 1 and 2 also show that the quintile with the greatest
revenues has an SDE to revenue figure of 13.3%, while those in the middle quintile have a figure of 20.0%, and the
smallest companies have 35.8%.
4
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Benchmarking Seller’s Discretionary Earnings in a Small Business: Based on data from Pratt’s Stats
Exhibit 1. Seller’s Discretionary Earnings by Quintile and Based on Revenues
Quintile
Revenue
Owner’s
Compensation
Discretionary
Earnings
Selling
Discretionary
Price to
Earnings to Discretionary Gross Profit
Operating
Revenue
Earnings
Margin
Profit Margin
Net Profit
Margin
1
$2,323,249
$90,000
$345,933
13.3%
3.0 x
43.0%
7.0%
7.0%
2
$820,652
$31,875
$147,127
17.8%
2.3 x
63.0%
11.0%
10.0%
3
$446,000
$7,000
$87,376
20.0%
2.1 x
68.0%
14.0%
13.0%
4
$240,192
$0
$61,281
25.3%
1.8 x
73.0%
20.0%
19.0%
5
$112,571
$0
$36,925
35.8%
1.7 x
84.0%
30.0%
30.0%
All companies with a value of Discretionary Earnings were included. Quintiles sorted by revenue. Data represent medians for that quintile. Total count of
companies: 4287. Jan. 1, 2010 - present. U.S. deals only. Private buyers only.
Owner’s compensation is the salary the owner pays himself/herself. Discretionary earnings is a better measure of cash flow to the owner, which includes
the owner’s salary and the earnings of the business prior to depreciation, amortization, and interest expenses. Includes SIC codes 0111-9999.
Exhibit 2. Median Discretionary Earnings (DE) and DE to Revenue by Quintile
$400,000
40%
Discretionary Earnings
$350,000
35%
Median Discretionary Earnings to Revenue
$300,000
30%
$250,000
25%
$200,000
20%
$150,000
15%
$100,000
10%
$50,000
5%
$0
Discretionary Earnings to Sales
Median Discretionary Earnings
0%
1
2
3
4
5
Quintile
As company size increases, based on revenues, businesses sold for a greater price relative to discretionary earnings.
Exhibit 3 shows that the companies in the quintile with the highest revenues sold their businesses for 3.0 times
their SDE figure, while those in the middle quintile sold their business for 2.1 times discretionary earnings, and the
smallest companies sold for 1.7 times.
Exhibit 3. Median Selling Price to Discretionary Earnings (DE) and Median Revenue by Quintile
3.5
$2,500,000
Median Revenue
$2,000,000
3.0
Revenue
2.5
$1,500,000
2.0
1.5
$1,000,000
1.0
Selling Price to DE
Median Selling Price to Discretionary Earnings
$500,000
0.5
$0
0.0
1
2
3
4
5
Quintile
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5
Benchmarking Seller’s Discretionary Earnings in a Small Business: Based on data from Pratt’s Stats
As size increases, companies tend to be less profitable. The largest companies shown in Exhibit 4 have a median
operating profit margin of only 7.0%, while those in the middle quintile have an operating profit margin of 14.0%,
and the smallest companies have an operating profit margin of 30.0%. This also means that, as company profitability decreases, companies sell for a greater selling price relative to discretionary earnings. From our data, the
most profitable group of companies (those with a median operating profit margin of 30.0%) sold for 1.7 times SDE,
while the group in the middle with operating profit margins of 14.0% sold for 2.1 times SDE, and the least profitable
companies (those with margins of only 7.0%) sold for 3.0 times SDE.
Exhibit 4. Median Revenue and Operating Profit Margin by Quintile
35%
$2,500,000
Median Revenue
30%
Revenue
25%
$1,500,000
20%
15%
$1,000,000
10%
$500,000
5%
$0
0%
1
2
3
Quintile
6
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4
5
Operating Profit Margin
Median Operating Profit Margin
$2,000,000
BVR
What It’s Worth
Benchmarking Seller’s Discretionary
Earnings in a Small Business: Based
on data from Pratt’s Stats
Seller’s discretionary earnings is an integral figure in small-businesses transaction data. For a business appraiser,
it represents an important financial metric for valuation. For a business intermediary, it is a crucial figure used to
price and list a business for sale. For the owner-operator of a small business, it represents a measure of earnings
- a figure that can serve as a benchmark indicator for other companies in the same industry.
A BVR Special Report
Benchmarking Seller’s
Discretionary Earnings
in a Small Business
Based on data from Pratt’s Stats
This new special report reveals what small business owners are achieving in seller’s discretionary earnings by sector and company size with
benchmarking from 21 industry groupings including real estate, personal
services, restaurants, construction and more. We used Pratt’s Stats, a
database of over 23,000 business transactions to analyze seller’s
discretionary earnings in sold private businesses with metrics including
discretionary earnings to revenue, selling price to discretionary earnings,
and profit margins.
Industries covered in the report include:
•
•
•
•
What It’s Worth
•
•
•
•
•
•
Agriculture, Forestry, and Fishing (SIC 0111-0971)
Construction (SIC 1011-1411)
Manufacturing (SIC 2011-3999)
Transportation, Communications, Electric, Gas, and Sanitary
Services (SIC 4011-4971)
Retail Trade (SIC 5211-5999)
Food Stores (SIC 54)
Automotive Repair, Services, and Parking (SIC 75)
Restaurants (SIC 5812)
Bars and Drinking Places (SIC 5813)
And more!
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