Revenue isn’t profit, and ARR isn’t cash
Annual recurring revenue (ARR) is a run-rate measure. Trailing recognized revenue describes a period of performance. Annual upfront billing can put cash in the bank before the related service revenue is recognized. Compare consistent dates and accounting bases.
Start with an earnings reconciliation
A conventional EBITDA bridge adds interest, income tax, depreciation and amortization back to net income. Operating EBITDA also removes separately disclosed nonoperating income. Keep the label explicit: operating profit, EBITDA and cash flow are not interchangeable.
EBITDA − nonoperating income = operating EBITDA
What changes with SDE?
SDE considers a buyer who will take over one working owner’s role. It can add back that owner’s compensation, together with supportable adjustments. Other essential owner roles still need market-rate compensation. Owner distributions are not an additional operating expense to add back.
What changes for a managed business?
A buyer who will not do the founder’s work needs a realistic replacement cost. Normalized managed earnings should account for all essential owner roles. Adding back salary without considering the work that must continue can overstate earnings.
Not every expense is an add-back
A genuinely nonrecurring expense needs evidence that it was included in reported earnings and will not recur in normal operations. Recurring support, development and marketing are not discretionary simply because a founder would prefer to exclude them. One expense must not be counted twice. Nonrecurring income may need to be removed, too.
Why this is still not a valuation
Earnings do not establish a sale multiple. Deal terms, transferable IP, recurring revenue quality, concentration, founder dependency and the buyer’s plans all matter. Headline transaction value is also different from equity value or the cash a founder receives after debt, fees and contingent payments.
This is general educational material, not accounting, investment, tax or transaction advice. AppsWorth does not offer a public valuation calculator. Discuss business-specific adjustments with a qualified adviser.