DO YOU KNOW YOUR EBITDA?

 

EBITDA concept  written in a notebook on a wooden table.

Do you know what your business is worth?

There are 2 important elements to determine your business valuation – business multiples and EBITDA.

We will focus on what EBITDA is and why it’s important you know this critical number.

Even if you’re not planning to sell now, or in the near future, it’s still important to understand and appreciate the value of your business for the following reasons:

  1. You can identify and deal with any financial risks.
  2. You’ll be able to determine the best way to groom your business.
  3. You’ll gain insight into the range of factors that potential buyers will use when coming up with their valuation.
  4. Your expectation in terms of appropriate selling price, when you decide to sell, will be grounded in reality.

There are different ways to value your business however I want to focus on a critical component in most of the valuation methods.

The first thing to establish in your business is the ‘magic number’…..the ‘true level’ of your businesses profitability.

This number is the businesses Earnings before Interest, Tax, Depreciation and Amortisation [EBITDA].

So you’re net profit maybe $250k but when you add back bank interest, tax, depreciation and amortization totaling $150k, the profit increases to $400k.

Stay with me as we aren’t finished yet…..

In analyzing any private businesses accounts, there are usually a number of items on the profit/loss accounts that need to be ‘adjusted’ and ‘recast’ in order to achieve the ‘true’ number.

We, as business owners, are highly motivated to pay the least amount in corporate taxes.

We need to search out these ‘legally padded’ expenses such as the extra family staff on the books, pension contributions, cars, telephones, computers and all the weird and wonderful individual  stuff being expensed through the business.

A little profit becomes a big profit when you add back these expenses so the $400k may now have risen to $750k.

What was a net profit of $250k has now become $750k and this represents the ‘true’ profit figure.

Why is this important?

To calculate your business valuation you attach a multiplier [usually between 1- 10] to the profit figure.

The higher the profit figure…..the greater the valuation.

When it comes to selling your business and maximize your exit, the purchaser will fight hard to lower your EBITDA by claiming your profits are artificially high and they would incur additional expenses if they owned your business.

So you can now work out your EBITDA….if you need any help let me know.

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