You have finally decided, “I’m going to sell my website“. You may have read the various methods to reach a value of a website and the various factors that go into such calculations. You probably understand that most often a website valuation is based heavily on its net earnings referred to in many different ways, EBIT/EBITDA (earnings before interest, taxes – depreciation and amortization. In those cases in which owners extract cash from the profits the net profits are referred to as Owner’s Discretionary Cash flow (ODC) or Sellers Discretionary Earnings (SDE). Therefore one specific category that very often becomes a topic of discussion and negotiation is the owner’s salary.
Let’s use the following example for this article: A business for sale generates $800,000 in net earnings on its Profit and Loss but within that lies a salary to the owner of $200,000. Is the ODC/SDE $800,000 or is it $1 million? The answer is, “it depends” or more precisely its not a simple yes or no.
For companies where the owner does not have an active role and functions more as an officer of the company or investor absent from day to day operations we generally would consider that salary to be part of ODC/SDE and consider a $1 million figure [from the example above]. After all, he is already paying staff to do everything necessary to run the business day to day. If however, this owner has an active managerial role it can become harder to argue that his/her salary should be added back to the bottom line. The business needs to be managed and that role demands a salary which of course is an expense to the business. In the above mentioned scenario however, We would argue that such a salary is not $200K so for valuation purposes, possibly it’s cut in half and the net profit becomes $900,000.
Whether the salary is deducted or not can depend on several additional factors when considering a website valuation. The size of a business can influence this argument. If the company for sale is small, then likely buyers are typically owner/operators looking to be self employed. They would consider a seller’s salary as ODC/SDE for valuation purposes as they themselves will be entrenched in an active role. The larger a company gets however, the harder it is to argue for this when selling a website. Primarily because the larger a company is, the more likely the buyer will be a corporation which will need to replace an active owner with an active manager with a salary. There is no line in the sand, ultimately it can be a moving target, one which you and your business broker or m&a advisor should discuss strategy. We may argue that you can’t punish the seller for a buyer’s business model but The reality is the buyer can form his valuation anyway he likes, a seller is always free to say, “No thank you”.