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Strategy 4 Saturday Blog (<4 minute read)
Why EBITDA Is Essential for Boosting Your Business Value
If you’re a business owner considering selling your company someday, it’s essential to start focusing on EBITDA. That is earnings Before Interest, Taxes, Depreciation, and Amortization. This metric is considered the gold standard in valuing businesses for potential sales, and it’s what sophisticated buyers look at first. In this blog, I’ll walk you through why EBITDA matters, how it’s calculated, and why it’s a critical KPI for anyone thinking about their company’s future worth.
Common Metrics Business Owners Use—and Why EBITDA is Different
Many business owners who aren’t steeped in finance tend to focus on metrics like sales (or revenue), net income, or their bank balance. These are certainly important indicators of a company’s health. Sales show growth, net income reflects profitability, and cash flow is the lifeblood of any business. However, when it comes to valuing a business for sale, the most important measure is EBITDA.
Each year, roughly 50,000 business owners in the U.S. sell their companies, yet many are unaware of what potential buyers are specifically seeking. When buyers see that a business isn’t tracking EBITDA, it can be a red flag that the seller may not fully understand their business’s value. In some cases, this lack of understanding opens the door for buyers to negotiate a better deal for themselves. Knowing and tracking EBITDA demonstrates to buyers that you’re aware of how business valuation works, putting you in a stronger position.
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What is EBITDA?
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It’s essentially a way of understanding a company’s operating performance without the impact of financial decisions (like loans) and accounting choices (like depreciation and amortization).
On a typical income statement, you might see these categories:
- Sales
- Gross Margin
- Operating Expenses
- Operating Margin
- Other Income/Expenses
- Pre-Tax Income
- Net Income
For our purpose, EBITDA starts with the earnings line and then removes specific items that may vary from one company to another:
- Earnings
- Less Interest
- Minus Taxes
- Less Depreciation
- Less Amortization
- = EBITDA
This metric provides a clearer view of how the business performs operationally and is a crucial metric for potential buyers who want to understand profitability without the influence of non-operational expenses.
Why EBITDA Matters for Your Business Value
EBITDA is one of the main factors used to determine the value of your business. By showing potential buyers that your business has strong earnings before interest, taxes, depreciation, and amortization, you’re essentially highlighting the core financial health of the company. Buyers view a strong EBITDA as a sign of stability and profitability, making your business a more attractive investment.
EBITDA as a benchmark standard
EBITDA is not only measured as a total but also as a % return of sales. If you are curious how you stack up against your competition, here are several websites where you can compare your EBITDA and EBITDA %.
Websites that can help:
- FullRatio: Provides comprehensive data on average EBITDA margins and multiples across various U.S. industries, allowing for direct comparison with your company’s performance.
- New York University Stern School of Business: Offers detailed financial data, including operating and net margins by industry, which can serve as a benchmark for your EBITDA analysis.
- Siblis Research: Publishes current and historical Enterprise Value to EBITDA (EV/EBITDA) multiples by sector, aiding in the valuation and comparison of your company’s financial metrics.
- Equidam: Provides EBITDA multiples by industry, offering insights into how your company’s EBITDA compares within your specific sector.
- Valentiam Group: Analyzes EBITDA multiples across industries, helping you understand valuation trends and how your company’s EBITDA aligns with industry standards.
- eVal: Summarizes trailing industry enterprise value multiples for U.S. listed firms, including EBITDA multiples, facilitating comparison with your company’s financial performance.
- Chief Executive: Offers profitability benchmarks, including EBITDA margins, across various industries, providing a context for evaluating your company’s financial health.
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Next week we are featuring a special guest, Sean Healy, President of Accounted4. Tune in to learn more about financial management for your business.
- Mon, 11/18 – Sean Healy– Creating Financial Forecasts
- Tues, 11/19 – Sean Healy– Annual Operating Plan
- Wed, 11/20 – Sean Healy– Comparing Actual to Budget
- Thurs,11/21 – Sean Healy – Financial Reporting Process
- Fri, 11/22– Carl J Cox – Why EBITDA is the gold standard
- Tues, 11/19 – Jack Espy
- Thurs,11/14 – Ian Peterman (re-release)
