I used to own a small business that dealt in cash. It was automated and only required attention once or twice a week. On Saturday mornings I would swing by, do a little clean-up and maintenance and throw the cash from the bill acceptors into my pocket.
On the way home, I’d stop by the local café for pancakes. When I finished, I’d read the news and wait for the bill to come. Given it was a small-town café my breakfast, including tip, usually cost me about $10.
As part of that routine, I got into a bad habit. Instead of reaching for my wallet, I’d reach into the pocket that held the cash I collected. I’d grab a $10 bill and leave it for the waitress. When I got home, I’d throw the cash in an envelope for the bank and not think any more of it. No defense, I guess I justified it as a “petty cash” travel expense at the time.
I didn’t do this very often (once or twice a month). And what I learned after I sold the business kept me from doing it again.
The factor most commonly used to value a small business is called Seller’s Discretionary Earnings (SDE). SDE has other names like owner’s benefit, seller’s discretionary income, etc. But all these terms are designed to answer one question: What is the financial benefit of being the full time, owner operator of a business?
That “benefit” might take the shape of the owner’s salary, benefits the owner receives (car, insurance, etc.), but it also includes net profit, and other accounting addbacks. It’s basically EBIDTA (Earnings Before Interest, Depreciation, Taxes and Amortization) + one owner’s compensation.
Most small businesses are valued by taking that SDE figure and applying a multiple based on several factors (industry, risk, etc.) In my case, the multiple used for the business was right around 4. That was higher than the 2.5 average for small businesses but was appropriate given how little time the business required to maintain.
So, the value formula of my business was 4 X SDE.
It felt good selling the business, but soon after my deal closed it occurred to me what my pancake money “sneaking” had really cost me. Since the $10 I used to pay for breakfast reduced my revenue by $10, it also reduced my SDE by $10. And since $10 x 4 = $40, every pancake breakfast cost me $40 off the value of my business.
The pancakes weren’t that good.
I’ve met owners over the years that have taken pride in their “creative cash management.” I’ve heard them boast about how much they’ve “saved”. Then I’ve seen the look when they realize the real cost of their “savings.”
You can’t have your pancakes and eat them too.
Learn to leave.