How Every Number Is Calculated — A Complete Guide for Advisors
This guide provides complete transparency into every calculation in the BSP Advisor Portal.
Use it to understand the methodology, verify accuracy, and confidently explain valuations
and assessments to your clients. Every formula is documented with plain-English explanations
and practical tips for client conversations.
1. Profit & Loss (P&L)
The foundation of all financial analysis. The portal tracks three years of historical data
to identify trends and calculate weighted averages.
Net Revenue = Gross Revenue − Returns & Allowances
What This Means:
Net Revenue is your actual top-line sales after accounting for refunds, discounts, and returned goods.
This is the starting point for all profitability calculations.
Total COGS = Materials + Direct Labor + Subcontractor Costs + Other COGS
What This Means:
Cost of Goods Sold includes only the direct costs to produce or deliver your product/service.
If you didn't make the sale, you wouldn't incur these costs.
Gross Profit = Net Revenue − Total COGS
What This Means:
Gross Profit is what's left after direct costs. This is the pool of money available to cover
overhead, pay yourself, and generate profit.
Operating expenses are the costs to run the business that aren't directly tied to production.
These costs remain relatively stable regardless of sales volume.
EBIT = Gross Profit − Total OpEx
What This Means:
Earnings Before Interest and Taxes (EBIT) shows operating profit before financing costs and tax considerations.
This is a key measure of operational performance.
Net Income = EBIT + Other Income − Other Expenses − Income Tax
What This Means:
Net Income is the bottom line — what the business earned after all costs, taxes, and non-operating items.
How to Explain to Clients:
"Think of it like a waterfall: Sales come in at the top, direct costs come out first (COGS),
then overhead flows out (OpEx), and what's left at the bottom is your net profit. We track three
years so we can see if the waterfall is getting stronger or weaker over time."
These are legitimate business expenses that a new owner might handle differently. Owner comp
adds back because the new owner sets their own salary. Depreciation is a non-cash expense.
Interest adds back because it reflects current financing structure, not operations.
These are expenses that run through the business but wouldn't continue under new ownership.
Examples: owner's personal vehicle, family member salaries above market rate, one-time legal fees,
country club memberships, personal travel.
Total Add-backs = Standard + Discretionary
SDE = Net Income + Total Add-backs
What This Means:
SDE is the total economic benefit available to an owner-operator working in the business full-time.
This is the number buyers use to evaluate what they're really buying.
SDE Margin = (SDE ÷ Gross Revenue) × 100
What This Means:
SDE Margin shows how much of every revenue dollar flows through to owner benefit.
Higher margins indicate more efficient operations and stronger pricing power.
Weighting lets you emphasize more recent performance. Typical weighting: Year 1 = 1x, Year 2 = 2x,
Year 3 = 3x (most recent year counts three times as much as oldest year). This reflects the reality
that buyers care more about current performance than historical results.
How to Explain to Clients:
"SDE is what you really take home as owner-operator — not just the profit on your tax return, but
the full economic benefit including your salary, benefits, and legitimate personal expenses run
through the business. This is the number a buyer uses to decide what they're willing to pay."
3. Valuation Summary
Business value is driven by two factors: earnings (SDE) and risk (multiple). Better-run
businesses command higher multiples.
Base Multiple = Set manually or pulled from industry data (median SDE multiple)
What This Means:
The Base Multiple represents what similar businesses in your industry typically sell for,
expressed as a multiple of SDE. Industry data comes from actual transaction records (DealStats,
Vertical IQ). This is your starting point before adjusting for business quality.
VE Score = Weighted average across all 7 assessments, normalized to 0-100
What This Means:
The Value Enhancement (VE) Score measures how well-run your business is across seven dimensions.
See Section 4 for detailed calculation methodology.
Applied Multiple = Base Multiple + (VE Score ÷ 100) × (4.0 − Base Multiple)
What This Means:
The Applied Multiple adjusts the base multiple based on business quality. A perfect VE Score
of 100 would yield a 4.0x multiple. The formula creates a sliding scale: if your base multiple
is 2.5x and your VE Score is 50, your Applied Multiple = 2.5 + (0.50 × 1.5) = 3.25x.
How to Explain to Clients:
"Think of valuation like buying a rental property. The property's income is like SDE — that's
what it generates. But two properties with the same income don't sell for the same price if one
is in better condition. The VE Score measures your business's 'condition' — systems, documentation,
financial controls, customer concentration. Better condition = higher multiple = more valuable business."
Enterprise Value = Selected SDE × Applied Multiple
What This Means:
Enterprise Value is what a buyer would pay for the business operations (before adjusting for
working capital, debt, and other balance sheet items).
Value Creation Opportunity
Current State = SDE × Base Multiple (before BSP engagement)
Projected State = SDE × Applied Multiple (after BSP engagement)
Value Creation = Projected State − Current State
What This Means:
Value Creation shows the increase in enterprise value achieved by improving business quality
(raising the VE Score). This is the dollar amount of equity created through operational excellence,
not revenue growth.
Sensitivity Analysis
The portal generates a matrix showing Enterprise Value at different scenarios:
SDE levels: 80%, 90%, 100%, 110%, 120% of current SDE
Multiples: 2.0x, 2.5x, 3.0x, 3.5x, 4.0x
What This Means:
Sensitivity analysis shows how value changes under different assumptions. This helps clients
understand upside potential (if they improve both earnings and operations) and downside risk
(if earnings decline or quality issues emerge).
4. Value Enhancement (VE) Score
The VE Score is a comprehensive measure of business quality derived from 387 questions across
seven assessment categories.
Per-Assessment Average = Sum of answered scores ÷ Count of answered questions
Normalized Score = (Average ÷ 6) × 100
What This Means:
Each question is scored 1-6. The normalized score converts this to a 0-100 scale for easier interpretation.
Weight = Number of questions in that assessment
VE Score = Weighted average of all normalized scores
What This Means:
The VE Score is calculated as a weighted average, where assessments with more questions have
proportionally more influence. This ensures comprehensive assessments (like Exit Readiness with
115 questions) carry more weight than focused ones (like Org Alignment with 20 questions).
"The VE Score is like a comprehensive inspection report on your business. Just like a home
inspector checks foundation, roof, electrical, plumbing — we check seven critical areas that
buyers evaluate. The score isn't subjective — it's based on 387 specific questions about systems,
processes, documentation, and controls. Higher score = lower buyer risk = higher multiple."
5. Value Potential Waterfall (4 Stages)
The Value Potential Waterfall shows how business value increases through four sequential stages
of improvement. Each stage builds on the previous one.
Stage 1 — Resolve Profit Gap
Focus: Operational efficiency — reducing costs to industry benchmarks
Revenue = Current Revenue (no change)
COGS = Current COGS × (1 − COGS Improvement %)
Labor = Current Labor × (1 − Labor Improvement %)
Overhead = Current Overhead × (1 − Overhead Improvement %)
SDE = Recalculated with reduced costs
Multiple = Base Multiple (no change)
What This Means:
Stage 1 focuses purely on cost optimization. If your costs are above industry benchmarks,
this stage shows the value created by bringing them in line. Default assumptions: 2% COGS
reduction, 5% labor reduction, 0% overhead reduction.
Stage 2 — Best-in-Class Financials
SDE = Same as Stage 1
Multiple = Same as Stage 1 (placeholder for future enhancements)
What This Means:
Stage 2 is currently a placeholder for future enhancements focused on financial sophistication
(KPIs, forecasting, management systems). In current implementation, it mirrors Stage 1.
Stage 3 — Risk Reduction
SDE = Same as Stage 2
Multiple = Base Multiple + Risk Multiple Increase
What This Means:
Stage 3 shows value created by reducing business risk through systems, documentation, and
process standardization. Default assumption: +1.0x multiple increase. This stage keeps
earnings constant but increases the multiple due to improved transferability.
Stage 4 adds strategic initiatives that drive revenue growth while maintaining or improving
margins. Default assumptions: 0% revenue growth (conservative), +0.5x multiple increase
(reflects strategic positioning and growth trajectory).
Total Value Creation = Stage 4 Valuation − Current Valuation
Default Settings
Parameter
Default
COGS Improvement
2%
Labor Improvement
5%
Overhead Improvement
0%
Risk Multiple Increase
+1.0x
Strategic Multiple Increase
+0.5x
Revenue Growth
0%
How to Explain to Clients:
"Think of this as a roadmap showing four levels of value creation. Stage 1: Fix the leaks
(reduce excess costs). Stage 2: Build financial intelligence. Stage 3: Reduce risk (make the
business run without you). Stage 4: Position for growth. Each stage builds on the last, and
each creates value in different ways — some through higher earnings, some through higher multiples.
The total shows what's possible if you execute the full roadmap."
6. Financial Scorecards (6 Categories, Letter Grades A+ to E-)
Financial scorecards grade your business across six dimensions using industry-standard metrics.
Each metric has a target threshold based on best practices.
Liquidity
Current Ratio = Current Assets ÷ Current Liabilities Target: 2.0:1 or higher
What This Means:
Current Ratio measures your ability to pay short-term obligations. A ratio of 2.0 means you
have $2 in current assets for every $1 in current liabilities. Higher is safer.
Quick Ratio = (Current Assets − Inventory) ÷ Current Liabilities Target: 1.0:1 or higher
What This Means:
Quick Ratio is a more conservative liquidity measure that excludes inventory (which may not
convert to cash quickly). A ratio of 1.0 means you can cover current liabilities with liquid
assets alone.
Working Capital
A/R Days = (Accounts Receivable ÷ Net Revenue) × 365 Target: ≤45 days
What This Means:
A/R Days measures how long it takes to collect payment from customers. Lower is better.
45 days means customers pay within 1.5 months on average.
A/P Days = (Accounts Payable ÷ COGS) × 365 Target: ≤55 days
What This Means:
A/P Days measures how long you take to pay suppliers. You want this longer than A/R Days
(collect before you pay) but not so long that you damage supplier relationships.
Inventory Days = (Inventory ÷ COGS) × 365 Target: ≤60 days
What This Means:
Inventory Days measures how long inventory sits before being sold. Lower is better — less
cash tied up, lower carrying costs, fresher product.
Profitability
Gross Margin = (Gross Profit ÷ Net Revenue) × 100 Target: 40% or higher
What This Means:
Gross Margin shows what percentage of revenue remains after direct costs. 40% means you keep
40 cents of every dollar to cover overhead and generate profit.
Net Margin = (Net Income ÷ Net Revenue) × 100 Target: 7% or higher
What This Means:
Net Margin shows bottom-line profitability as a percentage of sales. 7% means you keep 7 cents
of every dollar as net profit.
NOPAT Margin = (EBIT × 0.75 ÷ Net Revenue) × 100 Target: 4.5% or higher
What This Means:
NOPAT (Net Operating Profit After Tax) Margin shows operating profit after a standardized tax rate
(25%). This normalizes profit across different tax situations and financing structures.
Efficiency
ROE = (Net Income ÷ Total Equity) × 100 Target: 12% or higher
What This Means:
Return on Equity measures how efficiently you're using shareholder investment. 12% means every
dollar of equity generates 12 cents of profit annually.
ROA = (Net Income ÷ Total Assets) × 100 Target: 7% or higher
What This Means:
Return on Assets measures how efficiently you're using all company assets (regardless of how
they're financed). 7% means every dollar of assets generates 7 cents of profit.
ROCE = (EBIT ÷ Capital Employed) × 100 Target: 10% or higher
ECROCE = (NOPAT ÷ Capital Employed) × 100 Target: 8% or higher
Capital Employed = Total Equity + Total Debt
What This Means:
ROCE (Return on Capital Employed) and ECROCE (Effective Cash ROCE) measure how efficiently
you're using the total capital invested in the business, whether from shareholders or lenders.
Asset Usage
Asset Turnover = Net Revenue ÷ Total Assets Target: 4.0x or higher
What This Means:
Asset Turnover measures how efficiently you generate revenue from your asset base. 4.0x means
you generate $4 in revenue for every $1 in assets.
Working Capital Absorption shows how much cash is tied up in day-to-day operations relative
to revenue. Lower is better — less cash locked up means more available for growth or distribution.
Interest Coverage measures how easily you can pay interest on debt. 3.0x means you generate
$3 in operating profit for every $1 in interest expense. Higher = safer debt load.
Debt-to-Equity = Total Debt ÷ Total Equity Target: <1.0:1
What This Means:
Debt-to-Equity shows the balance between borrowed money and owner investment. Below 1.0 means
you have more equity than debt — a safer capital structure.
Grading Scale
Grade
Passing Metrics
A+
90%+ passing
A
80% passing
A-
70% passing
B
60% passing
C
50% passing
D
40% passing
E
30% passing
E-
Below 30%
What This Means:
"Passing" means meeting or beating the benchmark target for that metric. Grades are assigned
to each of the six categories based on the percentage of metrics in that category that pass.
How to Explain to Clients:
"Think of this like a report card for your business. Each category tests different aspects of
financial health. Liquidity = can you pay bills? Working Capital = is cash flowing efficiently?
Profitability = are you making enough money? Efficiency = are you using resources well? Asset
Usage = are you getting value from what you own? Gearing = is your debt manageable? Letter grades
make it easy to see strengths and weaknesses at a glance."
7. KPI Dashboard (7 Key Performance Indicators)
The KPI Dashboard tracks seven critical metrics with trend analysis comparing Year 1 (oldest)
to Year 3 (most recent).
ROI = (Net Income ÷ Total Assets) × 100
What This Means:
Return on Investment measures overall profitability relative to assets deployed.
ROE = (Net Income ÷ Total Equity) × 100
What This Means:
Return on Equity measures profitability relative to shareholder investment.
A/R Days = (Accounts Receivable ÷ Net Revenue) × 365
A/P Days = (Accounts Payable ÷ COGS) × 365
Fixed Asset Turnover = Net Revenue ÷ Net Fixed Assets
What This Means:
Fixed Asset Turnover measures how efficiently you generate revenue from equipment, buildings,
and other fixed assets. Higher is better.
Each KPI shows a trend arrow comparing Year 1 to Year 3:
Green ▲ = Improving (Year 3 better than Year 1)
Red ▼ = Declining (Year 3 worse than Year 1)
What This Means:
Trend analysis shows trajectory, not just current performance. A business improving on 5-6
metrics shows operational momentum — attractive to buyers. Declining trends signal problems
that need addressing.
How to Explain to Clients:
"These seven metrics are the vital signs of your business. Just like a doctor tracks heart rate,
blood pressure, temperature — we track profitability, asset efficiency, and cash flow. The arrows
show whether you're getting healthier or sicker over time. Buyers pay premium multiples for
businesses with strong vital signs AND positive trends."
8. Breakeven Analysis
Breakeven analysis shows how far revenue can drop before the business stops making money.
This is critical for understanding downside risk.
Variable costs change proportionally with revenue. COGS is fully variable. Operating expenses
are partially variable — the Variable % setting (typically 30-50%) determines how much.
Fixed costs don't change with revenue in the short term. Rent, insurance, base salaries —
you pay these whether you have a great month or a slow month.
Contribution Margin is the percentage of each revenue dollar available to cover fixed costs
and generate profit. If your contribution margin is 45%, every dollar of revenue contributes
45 cents toward fixed costs.
Margin of Safety shows how far revenue can drop before you hit breakeven. A 30% margin of safety
means revenue can fall 30% and you're still profitable. Higher = safer business.
How to Explain to Clients:
"Breakeven analysis answers the question: 'How bad can things get before I'm losing money?'
Your Margin of Safety is your cushion. If revenue is $2M with a 35% margin of safety, you stay
profitable down to $1.3M in revenue. This is a critical risk metric — buyers want to see a
healthy margin of safety, ideally 25-40%."
9. Profit Gap / Benchmarking
Profit Gap analysis compares your cost structure to industry benchmarks to identify excess
spending and quantify the opportunity.
The analysis compares your costs (as % of revenue) to industry medians in three categories:
Cost of Sales (COGS): Materials, direct labor, subcontractors
Gap = Your $ − Benchmark $ (only if Your $ > Benchmark $)
What This Means:
The gap represents excess spending. If your COGS is 62% of revenue and the industry median
is 55%, you have a 7-point gap. Applied to $2M revenue, that's a $140K opportunity.
Total Profit Gap = Sum of all category gaps
% of Current Profit = (Total Profit Gap ÷ Net Income) × 100
What This Means:
This shows how much profit is being left on the table. If your Total Profit Gap is $180K and
Net Income is $150K, you're leaving 120% of current profit on the table — you could more than
double profit by hitting industry benchmarks.
Data Sources: Benchmarks come from Vertical IQ industry reports and DealStats
transaction data. When industry-specific data is selected, targets automatically update.
How to Explain to Clients:
"This is your reality check against the industry. We're not comparing you to Amazon — we're
comparing you to similar businesses in your industry. The gap shows where you're overspending
relative to peers. Maybe you're overstaffed. Maybe material costs are high because you lack
volume discounts. Maybe rent is too high. Whatever the cause, the gap is money that should be
flowing to the bottom line. And here's the kicker: buyers will absolutely factor this in. They'll
assume they can achieve industry-standard costs, so they'll value you as if you already have —
meaning you're leaving value on the table by not fixing this yourself."
10. Credit Risk Analysis
Credit Risk analysis evaluates debt load, coverage, and repayment capacity. This matters for
lenders, buyers (who want to see manageable debt), and business continuity.
NOPAT = EBIT × 0.75
What This Means:
Net Operating Profit After Tax uses a standardized 25% tax rate to estimate after-tax operating
profit. This normalizes comparisons across different tax situations.
EBITDA = EBIT + Depreciation
What This Means:
Earnings Before Interest, Taxes, Depreciation, and Amortization represents cash-based operating
profit (since depreciation is non-cash).
Debt Payback Period = Total Debt ÷ NOPAT (years)
What This Means:
Debt Payback Period shows how many years it would take to pay off all debt using after-tax
operating profit. Lower is better. Above 5 years indicates risky leverage.
Interest Coverage = EBIT ÷ Interest Expense
What This Means:
Interest Coverage shows how easily you can afford debt service. Below 2.0x is risky. Above
3.0x is comfortable.
Debt-to-Equity = Total Debt ÷ Total Equity
What This Means:
Debt-to-Equity shows leverage. Above 1.0 means more debt than equity — a risky capital structure
for most small businesses.
Debt-to-Assets = (Total Debt ÷ Total Assets) × 100
What This Means:
Debt-to-Assets shows what percentage of assets are financed by debt. Above 50% indicates high leverage.
Recoverable Value = Total Assets × 60%
What This Means:
Recoverable Value is a conservative estimate of liquidation value. In distress, assets rarely
fetch book value. 60% is a conservative haircut. Lenders compare this to debt to assess
downside protection.
Debt-to-EBITDA = Total Debt ÷ EBITDA
What This Means:
Debt-to-EBITDA is a standard lending metric. Below 3.0x is healthy. Above 4.0x raises flags.
Above 5.0x is dangerous.
How to Explain to Clients:
"Credit risk isn't just about getting loans — it's about business resilience. High debt plus
weak coverage means you're vulnerable if revenue dips. Buyers see this too. Heavy debt reduces
what they can borrow for the acquisition, so they'll either demand a lower price or require you
to pay down debt before closing. Healthy credit metrics = more options and higher valuations."
11. BSP Value Creation / ROI Formula
This formula quantifies the economic case for engaging BSP by showing the equity value at
stake due to organizational inefficiency.
Step 1: Total Annual Payroll (all compensation, benefits, payroll taxes)
Step 2: Organizational Inefficiency Cost = Total Payroll × 20%
What This Means:
Research shows poorly organized businesses waste 15-25% of labor due to inefficiency, rework,
poor processes, and unclear roles. We use 20% as a conservative midpoint.
Step 3: Cost of Doing Nothing Per Year = Inefficiency Cost ÷ 40%
What This Means:
This converts wasted labor into lost revenue at a 40% gross margin. If you waste $100K in
labor, you'd need $250K in additional revenue (at 40% margin) to cover that waste.
Step 4: Equity Value at Stake = Cost of Doing Nothing × 4
What This Means:
At a 4.0x multiple (premium for well-run business), annual inefficiency translates to enterprise
value loss. If you're wasting $250K/year, that's $1M in lost enterprise value.
Step 5: ROI = (Equity Value at Stake − BSP Fee) ÷ BSP Fee
What This Means:
ROI shows the return on investing in BSP to eliminate inefficiency and capture lost value.
Example Calculation
Step
Calculation
Result
1. Total Payroll
Given
$1,900,000
2. Inefficiency (20%)
$1.9M × 20%
$380,000
3. Revenue Equivalent (40% margin)
$380K ÷ 40%
$950,000/year
4. Equity at Stake (4x)
$950K × 4
$3,800,000
5. ROI (if BSP fee = $150K)
($3.8M − $150K) ÷ $150K
2,433% (24.3x return)
How to Explain to Clients:
"Here's the uncomfortable truth: most businesses waste 20% of their payroll on inefficiency —
unclear roles, poor processes, rework, miscommunication. You're not paying people to sit around;
you're paying them to work inefficiently. In your case, that's costing you $950K per year in
lost value. Over the life of the business, at a 4x multiple, that's nearly $4M in equity value
at stake. Our fee is $150K. The ROI isn't 2x or 5x — it's 24x. We're not selling consulting;
we're selling equity value capture."
12. Industry Benchmarks
The portal includes real industry data from Vertical IQ and DealStats for nine common
contractor/service industries. Selecting an industry auto-populates benchmarks throughout
the portal.
Available Industries
Security Systems Services
HVAC & Plumbing Contractors
Structural Metal Manufacturing
Sheet Metal Contractors
Commercial Building Construction
Specialty Trade Contractors
Electrical Contractors
Hair Care Services
General Contractors
Benchmark Data Included
Category
Data Points
Cost Structure
COGS %, Labor %, Overhead % (all as % of revenue)
Profitability
Gross Margin % (median)
Valuation Multiples
SDE Multiple — Low, Median, High (from actual transactions)
Growth Rates
Industry revenue growth % (historical average)
How Benchmarks Are Applied
Financial Scorecards: Target thresholds adjust to industry norms where applicable
Valuation: Base Multiple defaults to industry median SDE multiple
Sensitivity Analysis: Multiple ranges reflect industry transaction range (low to high)
What This Means:
Industry selection makes all analysis contextually relevant. A 55% COGS might be excellent for
one industry but terrible for another. Industry-specific benchmarks ensure apples-to-apples comparison.
How to Explain to Clients:
"We're not using generic 'small business' benchmarks. This data comes from real transactions
and real financial statements in YOUR industry. When we say your COGS is high, we mean high
compared to actual HVAC contractors (or whatever your industry is), not compared to restaurants
or software companies. This is the standard buyers will use to evaluate you, so it's the standard
we use to prepare you."