EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization and it measures the company’s overall financial performance.
Why EBITDA is Important for You
EBITDA results for your company for the current year and prior three years will heavily influence the price offered by buyers, which is usually expressed as a multiple of EBITDA. If, for example a buyer is willing to pay 4x EBITDA for your company, every $1 added to EBITDA can result in $4 more in the selling price.
Managing the business from today forward thinking about EBITDA and adding $100,000 per year to EBITDA through best practices such as managing your A/R or inventory more closely, this would add $400,000 to the price a buyer would otherwise be willing to pay! As part of our consulting services, Sell Side Quarterbacks can help you move down the path of managing your company to maximize EBITDA if we are engaged at an early stage.
EBITDA = Net Profit + Interest + Taxes +Depreciation + Amortization
The information required for EBITDA calculation should be included in your company’s income statement. Here it is important to reiterate the importance of accurate results as inaccuracy can result in over or undervaluation of the business and company’s profitability. It is advisable to invest in a reliable accounting system or consider working with experienced and trusted accountants for at least three years prior to selling your company to ensure accurate EBITDA analysis and a fair value for your business.
Adjusted EBITDA
The distinctions between EBITDA and adjusted EBITDA are minor, but they are important to understand. Adjusted EBITDA, in essence, normalizes this metric depending on a company’s revenue and expenses.
Here is a list of common EBITDA adjustments:
Non-operating income
Noncash expenses
Unrealized loss or gain
Single-time loss or gain
Litigation expense
Donations and goodwill impairments
Above market compensation for the owner (in private firms)
Assets write-downs
Gain or loss in foreign exchange
Owner bonuses and perks
Extraordinary items (e.g. a PPP loan which is forgiven)