I was reviewing the P&L of a park that showed roughly $125,000 gross revenue, $120,000 in expenses and then shows an “add back” of Seller Discretionary Earnings of $55,000. From the internet, SDE’s are basically write offs that perhaps should not have been written off. Is anybody familiar with this? Included in the SDE’s are $13,000 in donations, $8,000 in non essential utilities, and $2,500 in non essential phone.
It all seems a little suspicious.
You’re ok to be suspicious, but don’t get too wrapped up into what the seller is doing because most moms and pops don’t run these assets like a business. Rebuild the financials using your own model and see what the park can be. Then, use the seller’s numbers as ammunition to get a lower price. Last park we closed on had $240,000 of gross revenue with every utility billed back (even trash). Seller’s NOI was $26,000 in 2014. We bought the thing for $650,000 with decent seller financed terms. Since then, we’ve raised rents 20% and fired 3 of the 5 employees (seller did these two things for us before we closed). Our extremely conservative expected NOI next year is $115,000. Once we get through some of the turnover, it should be north of $150k. So, buy at a 4CAP and push to a 23CAP. Works for me!
Charles D is 100% correct. We bought a park in Illinois that had an EBITDA of ($38,000) the year before purchase, and an EBITDA of +$270,000 in year one after we bought it. How did we do that? We fired the staff, which he was paying $250,000 per year, and replaced them with a husband & wife team at $30,000 per year, along with a rent increase and filling some vacant POH.
Stories like this abound, and the moral is that moms & pops often have very poor management skills and you need to forge your own numbers based on proper management.