What Business Owners Should Know About EBITDA

Guest Interview

Michael Antongiovanni, Principal Consultant, Just Effective Management Solutions, LLC

When you start to envision the possibility of selling your business, you should take steps to make your business more attractive to potential buyers. From a business valuation perspective, this means paying more attention to your EBITDA (Earnings Before Interest and Taxes, Depreciation and Amortization),

We asked financial expert Michael Antogiovani to explain how your EBITDA numbers can affect your ability to find a good buyer.

Why is EBITDA used as a measure of valuation?

MA: The reason EBITDA is used as a measure is that it allows an investor to compare companies financial performance by looking at metrics that make different companies more comparable.

You start with the earnings of the company, and then you exclude Interest and Taxes. The reason investors want to exclude interest and taxes is to make companies more comparable. Interest and taxes can vary depending on the individual company strategy. For example, a highly leveraged company will have more interest expense. But this is not a function of the business performance, it is a deliberate decision on the capital structure of the company. The same can be true for taxes.

Depreciation and Amortization are the largest non-cash related expenses most companies will have. So these are added back to approximate the cash flow of the company.

EBITDA shows the investor the cash the business generates before paying taxes. This cash is available to either reinvest into the business or to return to the shareholders.

How can a printer improve their EBITDA?

MA: First, printers should measure their EBITDA and make it part of the financial review process. If you measure it, you will find ways to improve the earnings of the company, which is the main driver of EBITDA performance.

How does EBITDA relate to other business-health indicators an owner should be monitoring?

MA: EBITDA is only a financial metric. Eventually other business issues will have an impact on the financial performance of the business. This is why investors will look at the long term performance of EBITDA to see how a company is performing.

Why are multiples of EBITDA so important to a buyer?

MA: Buyers will pay a multiple of the EBITDA for a company. The multiple can be a large driver in the price and changes in the multiple can have a significant impact on the overall valuation of the business.

While many business sellers will focus on EBITDA, many do not focus on trying to maximize the multiple of the business. An increase in EBITDA of a business may not have the same impact as an increase in the multiple.

EBITDA multiples are a way to gauge the overall attractiveness of the business. The more attractive the business to a potential buyer, the higher a multiple they will be willing to pay for the business.

The objective for a seller is to do things that are attractive to a seller, these are things that will have an impact on the multiple. Examples are track record or revenue growth, contractual agreements or other elements that make it difficult for customers to switch, high performing management team, intellectual property, etc.

How does a seller predict a multiple range?

MA: Generally speaking there are ranges of multiples for industries. However these multiple ranges can be very broad. For example, in the print industry multiples can range between 4 and 8. That is a large range and there are deals that go below the 4 and above the 8.

Determining if your business is closer to 4 or closer to 8 requires having someone objectively look at the business and understand it from a seller’s perspective.

This can be difficult for most owners since they are generally focused on their businesses and not on the overall M&A market for the industry.

Sellers should talk to industry-experienced M&A advisors and ask what the advisors are seeing in the marketplace. Some of the questions to ask include:

• What are multiples for my segment of the industry?
• What is the activity level?
• What kind of factors are scaring buyers away?
• What are the key things buyers are looking for?

This may give you some indication of where in the range you may fall. Sellers can also engage a M&A advisor to do an opinion of value. In an opinion of value you get the M&A advisor’s opinion of what the company may sell for.

Getting the M&A advisor’s opinion of value is like asking a real estate agent about the value of your home. You are going to get what the professional thinks it can sell for today, in the current market.

Keep in mind that opinions of value that are guesses compared to opinions that are based on actual company data and performance.

An opinion of value is different from a formal appraised business valuation. A certified valuation is similar to what your bank or mortgage company requires to make a loan.