What are SDC and EBITDA?
SDC (Seller’s Discretionary Cash), also known as SCD (Seller’s Discretionary Cash Flow), is the total cash benefit or income the owner realizes from owning the practice. This is calculated by recasting the owner’s financial statements and adding the owner’s benefits to the profit of the business. Some examples of typical expenses that may be added back to arrive at the SDC for practices are:
SDC is used in determining the value of a business and is perhaps the most important figure by which practices are measured. While SDC is a very convenient way to measure the value of a practice, it doesn’t work for all practices. SDC valuations are only as reliable as the SDC figure itself. When dealing with cash practices it is often more reliable to consider the gross sales of the practice and then calculate what the SDC would be if you were operating the practice.
EBITDA (Earnings Before Interest Taxes Depreciation & Amortization) is similar to SDC in that it is the practice net profit with some add backs. EBITDA is basically the pre-tax profit of the practice with interest expenses and depreciation added to it. EBITDA is frequently used as the base number by which business values are determined for larger practices (typically over a few million dollars). The typical range for practice values is 1 ½ to 2 ½ times EBITDA; however, this varies with specialty and the individual practice. Most practices will sell at 50% to 85% of the previous year’s collections. The exceptional practices could sell for more at a premium.