No matter which of the many types of buyers you’ll encounter in this journey to sell your business, the term EBITDA will be up front and discussed in detail. Whether business Buyers are a strategic vs financial buyer, looking for synergies or seeking a lifestyle business they all want to know what your EBITDA has been over the past 3 years or more.
Being on top of your EBITDA is important. Determining it correctly is key to successfully selling a business. If you have a business for sale in Canada you need to get your EBITDA up. You should consider finding good providers of family business coaching and consulting, a trusted business advisor who will be integral in helping you improve your EBITDA in order to provide the best impression to Buyers.
Invest in your company before selling. Every dollar added to your EBITDA increases the selling price by $4-$6. Or in other words $100,000 of increased EBITDA could = $400,000 – $600,000 in your pocket. Not a Bad ROI.
Work with professional services companies offering sell side advisory services like a business intermediary, M&A consulting firms, specialists who provide coaching for business owners, family business coaching, a financial advisor business coach, sale advisor or a professional in business value consulting to determine your accurate EBITDA and to help you grow it.
This financial metric is like the North Star of business performance assessment. Picture yourself sailing on the vast ocean of entrepreneurship. You’ll need a reliable compass to guide you through the treacherous waters of financial analysis. EBITDA is that compass, shining bright, pointing you in the right direction.
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It’s a mouthful, I know, but bear with me. EBITDA strips away all those pesky expenses that can cloud the true profitability of a company. It’s like peeling back the layers of an onion to get to the juicy core. Business Buyers want to see the real, unadulterated earnings power of a business.
By excluding interest, taxes, depreciation, and amortization from the equation, EBITDA allows us to focus solely on the operating performance of a company. It’s like taking a magnifying glass and zooming in on the pure essence of a business’s ability to generate cash flow. We’re talking about the raw firepower, the muscle, the oomph that a company brings to the table.
Now, you might be wondering, “Eric, why exclude these expenses? Aren’t they important?” Yes, my business selling friend, they are indeed important, but sometimes they can obscure the true operational performance of a company. Interest expenses vary based on financing choices, taxes can be influenced by a multitude of factors, and depreciation and amortization are non-cash expenses that don’t reflect the current state of a company’s operations.
EBITDA allows us to compare apples to apples. It gives us a standardized measure of a company’s profitability, making it easier to determine market value of a company and compare businesses across different industries and capital structures. It’s like a common language that a business intermediary, local business brokers or M&A business advisors can use to communicate effectively with all types of buyers. But I must emphasize that EBITDA is not the end-all, be-all of financial analysis. It’s just one piece of the puzzle, albeit an important one. You need to consider other factors, such as cash flow, working capital management, and long-term sustainability, to get a comprehensive picture of a company’s financial health.
So, there you have it, EBITDA in a nutshell. It’s like a trusty compass that helps you navigate the complex world of financial analysis, enabling you to cut through the noise and uncover the true earnings power of a business. Remember this is an important and complex area of business selling you should utilize the expertise and experience of professional services companies to help you through the process of selling a business when is it time to sell your business.
A Little More Detail
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a financial metric used to measure a company’s operating performance and profitability. It provides a clearer view of a company’s profitability by excluding non-operating expenses and non-cash items. While there isn’t a single formula to calculate EBITDA, it can be derived using the following equation:
EBITDA = Operating Revenue – Operating Expenses + Depreciation + Amortization
Let’s break down the components of this formula:
Operating Revenue: This represents the total revenue generated from the company’s core operations. It includes sales revenue, service revenue, and any other income directly related to the company’s primary business activities. The calculation of operating revenue is crucial for assessing the financial performance and growth potential of a business. By analyzing the trends and composition of operating revenue, businesses can identify their most profitable products or services, target lucrative customer segments, and make informed strategic decisions to enhance their overall profitability.
Operating Expenses: These are the costs directly associated with the company’s operations. They include expenses such as the cost of goods sold (COGS), sales and marketing expenses, research and development costs, and general administrative expenses. Implementing cost-cutting measures, negotiating better supplier contracts, and optimizing resource allocation are some strategies that can help minimize operating expenses.
Depreciation: Depreciation is the systematic allocation of the cost of tangible assets over their useful lives. It represents the reduction in value of assets due to wear and tear, obsolescence, or aging. Depreciation expense is added back to EBIT (Earnings Before Interest and Taxes) to calculate EBITDA. By recognizing depreciation, businesses can accurately reflect the gradual consumption of their assets and ensure that their financial statements provide a true and fair view of their financial position
Amortization: Amortization is similar to depreciation but applies to intangible assets, such as patents, trademarks, copyrights, and goodwill. Amortization expense is added back to EBIT to calculate EBITDA.
By subtracting operating expenses from operating revenue and adding back depreciation and amortization, you arrive at EBITDA. This metric is commonly used by investors, analysts, and financial professionals to assess a company’s financial health and compare its performance to industry peers
You will become familiar with the term Normalized EBITDA, also known as adjusted EBITDA. Normalized EBITDA goes a step further by adjusting the EBITDA figure to remove any unusual or one-time items that may distort the company’s financial results. These adjustments are made to provide a more accurate representation of the ongoing or sustainable earnings of the business.
The specific adjustments made to calculate normalized EBITDA can vary depending on the company and its industry
Some common items that may be excluded or adjusted include:
Non-recurring Or One-time Expenses: These are expenses that are unlikely to occur regularly or are not expected to repeat in the future. Examples can include restructuring costs, legal settlements, or expenses related to a significant event like a merger or acquisition.
Non-cash Expenses: Certain expenses, such as depreciation and amortization, do not involve actual cash outflows but are included in EBITDA. Adjusting for these non-cash expenses can provide a clearer picture of the cash-generating ability of the company.
Non-operating Items: Income or expenses that are not directly related to the company’s core operations, such as gains or losses from the sale of assets or investments, interest income, or interest expenses, may be adjusted to reflect the company’s operating performance.
By normalizing or adjusting for these items, normalized EBITDA aims to provide a more accurate measure of a company’s underlying profitability and cash flow generation capacity. It is commonly used in financial analysis, especially for evaluating the performance of companies with unique or irregular financial situations, such as those in the technology sector or companies undergoing significant changes.
By normalizing EBITDA, analysts and investors can gain a better understanding of a company’s ongoing profitability and compare it more accurately to its peers or industry benchmarks.
On the other hand, not normalized EBITDA refers to the raw or unadjusted EBITDA figure, which includes all expenses and income items without any exclusions or adjustments. It represents the company’s operating performance without accounting for exceptional or non-recurring events.
It’s important to note that while normalized EBITDA provides a more accurate reflection of a company’s ongoing profitability, it is still a non-GAAP (Generally Accepted Accounting Principles) measure and should be used alongside other financial metrics and disclosures to assess a company’s financial health comprehensively.
It’s worth noting that while EBITDA is a useful metric for evaluating profitability, it does not include certain factors such as capital expenditures, working capital requirements, and changes in non-cash items, which can also impact a company’s overall financial health. Therefore, it’s essential to consider EBITDA alongside other financial measures when evaluating a company’s performance and making investment decisions.
Increasing EBITDA is a key objective for many businesses. While there are several common strategies to improve EBITDA.
Here are 15 underutilized ways to achieve this goal:
Cost Segregation: Consider engaging in a cost segregation study to identify assets that can be depreciated more quickly, resulting in lower tax liabilities and increased EBITDA. By separating costs into various asset categories, such as building, land improvements, and equipment, businesses can accelerate their depreciation deductions and reduce their tax liabilities. Cost segregation studies are often conducted by qualified professionals to ensure compliance with tax regulations and optimize tax savings.
Operational Efficiency: Focus on streamlining operations and identifying areas where efficiency can be improved. This can include optimizing supply chains, reducing waste, and implementing lean management principles. Improving Process Automation is a great opportunity to identify manual and repetitive tasks that can be automated using technology solutions. Automation can reduce labor costs, minimize errors, and increase operational efficiency, ultimately leading to higher EBITDA.
Expense Review: Conduct a detailed review of all expenses, including overhead costs, subscriptions, and service agreements. Identify areas where expenses can be reduced or eliminated without impacting business operations negatively.
Pricing Optimization: Conduct a thorough analysis of pricing structures and consider adjusting prices to maximize profitability. This can involve conducting market research, evaluating customer demand, and aligning pricing with value provided and can directly contribute to higher revenues and, subsequently, increased EBITDA.
Customer Segmentation: Identify different customer segments and tailor marketing strategies to target each segment effectively. By understanding customer needs and preferences, you can increase customer acquisition, retention, and revenue. Analyze your customer base to identify high-value customers and focus on building stronger relationships with them. This can lead to increased sales, higher average transaction values, and improved customer retention.
Cross-selling and Upselling: Implement strategies to encourage existing customers to purchase additional products or upgrade to higher-priced options. This can boost revenue per customer and improve overall profitability.
Employee Training and Development: Invest in employee training and development programs to enhance productivity, improve customer service, and foster innovation. Well-trained employees can positively impact operational efficiency and customer satisfaction, leading to increased EBITDA. Employee engagement and productivity can foster a positive work environment. Invest in employee performance-based incentives. Engaged and motivated employees tend to be more productive, leading to increased operational efficiency and ultimately higher EBITDA.
Asset Utilization: Analyze your company’s assets and identify any underutilized resources. By optimizing asset utilization, you can reduce costs, increase output, and improve profitability. Maximizing asset utilization enables businesses to generate more revenue with fewer resources, leading to improved profitability and return on investment.
Outsourcing Non-Core Functions: Consider outsourcing non-core functions that do not directly contribute to your company’s competitive advantage. This can help reduce overhead costs and allow the business to focus on its core operations.
Inventory Management: Implement effective inventory management techniques to minimize carrying costs and optimize stock levels. This involves accurately forecasting demand, monitoring inventory turnover, and implementing just-in-time inventory practices. Effective inventory management ensures that businesses have the right amount of inventory at the right time to meet customer demand while minimizing costs associated with excess or obsolete inventory.
Supplier Negotiations: Regularly review and negotiate supplier contracts to secure better pricing and terms. Exploring alternative suppliers and leveraging volume discounts can help reduce costs and increase EBITDA.
Supply Chain Optimization: Streamline your supply chain by negotiating better terms with suppliers, optimizing inventory management, and reducing transportation costs. This can help lower costs and improve overall operational efficiency. By leveraging technology, data analysis, and strategic partnerships, businesses can enhance supply chain efficiency, reduce costs, shorten lead times, improve customer satisfaction, and gain a competitive advantage in the market. Supply chain optimization also helps businesses respond effectively to market fluctuations, mitigate risks, and adapt to changing customer demands.
Technology and Automation: Embrace technological advancements and automation to improve efficiency and reduce labor costs. Implementing advanced systems and software can streamline processes, enhance productivity, and ultimately contribute to higher EBITDA.
Energy Efficiency: Implement energy-saving initiatives such as upgrading lighting systems, optimizing heating, ventilation, and air conditioning (HVAC) systems, and using energy-efficient equipment, which can reduce operating expenses.
Intellectual Property Monetization: Assess your intellectual property portfolio, such as patents, trademarks, or copyrights, and explore opportunities to monetize them through licensing, partnerships, or outright sales. This can generate additional revenue streams.
Remember that the effectiveness of these strategies may vary depending on your industry, business model, and specific circumstances. It’s important to carefully analyze and adapt these ideas to your unique situation.
Are you asking yourself how long does it take to sell a business? Or should I sell my business? What are the steps to selling a business and how much do I sell my business for? Do I need a business value consulting professional to calculate value of a company? If you’re looking for tips for selling a business from someone who specializes in family business coaching and consulting, you’ve come to the right blog.
As a trusted business advisor and sale advisor providing sell side advisory services I appreciate the opportunity to share my years of experience working with Owners just like you. In fact you may want to consider our online program Sell Your Business 4 More.