FAQs

EBITDA vs. SDE

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)

• Used most often in larger or more complex deals to reflect a company’s cash-generating potential without the influence of financing or accounting decisions.

SDE (Seller’s Discretionary Earnings)

• Common in smaller businesses with owner-operators.

• Adjusts EBITDA by adding back the owner’s salary and any non-essential personal expenses that are run through the business.

Why It Matters:

• EBITDA is typically the yardstick for comparing profitability among medium-sized enterprises or when you plan to bring in outside investors.

• SDE is more relevant when the owner is deeply involved in the business’s day-to-day operations and you’re analyzing how much income a new owner-operator could realistically expect.

LOI vs. IOI in Business Transactions

Letter of Intent (LOI)

An LOI is a semi-formal document that outlines the major terms of a proposed transaction between parties. It's more detailed and indicates a stronger commitment level.

When to use an LOI:

• After preliminary discussions have established serious interest

• When you're ready to outline specific terms and conditions

• Before beginning formal due diligence

• When you want to establish exclusivity during negotiations

• After an IOI has been accepted (in multi-stage processes)

Typical LOI components:

• Purchase price or price range

• Payment structure and terms

• Key conditions and contingencies

• Exclusivity period (no-shop clause)

• Timeline for due diligence and closing

• Basic representations and warranties

• Confidentiality provisions

Indication of Interest (IOI)

An IOI is a preliminary, non-binding expression of interest that signals a party's desire to explore a potential transaction further. It's less detailed and indicates a lower commitment level.

When to use an IOI:

• Early in the acquisition process

• In competitive bidding situations

• When basic information has been reviewed but detailed due diligence hasn't started

• To gauge seller interest before committing more resources

• When multiple potential buyers are being considered

Typical IOI components:

• Very broad valuation range

• General transaction structure

• Background on the interested party

• Request for additional information

• No exclusivity provisions

• Lighter on specific terms and conditions

The key difference is commitment level and timing: IOIs come earlier in the process with less detail, while LOIs represent a more serious step toward completing a transaction.

Real Estate's Impact

Real estate and physical assets significantly influence business deals in several important ways:

Balance Sheet Considerations

• Asset-Heavy Structure: Properties owned by the business strengthen the balance sheet and can support higher valuations

• Leased Arrangements: Long-term leases may represent significant liabilities that buyers must assume

• Hidden Value: Real estate may be worth substantially more than book value, creating opportunities for sale-leasebacks

Transaction Structure Options

• Stock Sale: Buyer acquires all assets including real estate, often with tax benefits for the seller

• Asset Sale: Allows selective purchase of real estate and other assets, typically preferred by buyers

• Carve-Out: Seller retains ownership of real estate and leases it back to the business, reducing purchase price

Due Diligence Complexities

• Environmental Assessments: Required for owned property (Phase I/II studies)

• Title Issues: Clear title and property surveys must be confirmed

• Zoning Compliance: Permits, variances, and compliance history need verification

• Deferred Maintenance: Property condition affects valuation and may require post-closing capital

Financing Implications

• Collateral Value: Real estate often serves as primary loan collateral

• SBA Considerations: SBA loans have specific requirements for real estate within transactions

• Separate Financing: Real estate can be financed separately from business operations

• Seller Financing: Property can be used in creative seller financing arrangements

Post-Closing Considerations

• Location Dependency: Business may be dependent on specific location

• Relocation Costs: Moving costs and business disruption if leases aren't transferable

• Expansion Potential: Available land or building capacity for future growth

LLC, S-Corp, C-Corp, Partnership, Other?

Each business structure carries distinct implications for acquisitions and sales:

S-Corporation

• Tax Advantages: Pass-through taxation avoids double taxation

• Stock Sale Complexity: Must maintain S-Corp eligibility requirements (limited shareholders, one class of stock)

• Built-In Gains: Potential tax liability for C-Corps converted to S-Corps within 5 years

• Basis Step-Up: 338(h)(10) election possible for stock sales with asset sale tax treatment

C-Corporation

• Double Taxation Challenge: Corporate level tax plus shareholder tax on distributions

• Stock vs. Asset Sale Gap: Sellers typically prefer stock sales; buyers prefer asset purchases

• Tax Loss Carryforwards: Potential value in NOLs, subject to Section 382 limitations

• International Flexibility: Better for international operations and investors

LLC

• Flexible Transaction Structure: Can be sold as entity interest or assets

• Tax Classification Options: Can be taxed as partnership, S-Corp, or C-Corp

• Operating Agreement Impact: Review for transfer restrictions and approval requirements

• Basis Adjustment: 754 elections may benefit buyers acquiring LLC interests

Partnership

• Similar to LLCs: Pass-through taxation with entity or asset sales possible

• Special Allocations: Complex profit/loss allocations may complicate valuation

• Partner Approval: Often requires unanimous consent for full entity sales

• Liability Considerations: General partners may have ongoing liability exposure

Key Transaction Considerations

Due Diligence Focus Areas:

• Tax returns and entity election history

• Shareholder/member/partner agreements

• Historical compliance with entity requirements

• Tax basis of owners' interests

Deal Structure Implications:

• Entity type often dictates optimal transaction structure

• Conversion possibilities before closing (may benefit both parties)

• Purchase price allocations critically important in asset deals

• Indemnification needs vary by entity type

Post-Transaction Planning:

• Entity structure may need to change post-acquisition

• Integration challenges with different entity types

• Compensation structure adjustments

• Tax reporting changes