“What’s my company worth?” is one of the most common questions we receive from clients who are thinking about selling their company. The answer is inevitably, “it depends, and it’s a question best answered by an investment banker or M&A advisor.” The follow up question from an investment banker or M&A advisor is almost always, “What’s your EBITDA?”
EBITDA, commonly pronounced Ee-bit-dah, is the most common metric for beginning to value a company. So what exactly, then, is EBITDA? EBITDA stands for Earnings before Interest, Taxes, Depreciation and Amortization. Below is a sample income statement to help illustrate EBITDA.
Earnings. Earnings are simply your company’s net earnings/income.
Interest. Interest is any and all interest paid by your company on its debt. In debt-free, cash-rich companies, the interest calculation may actually lower EBITDA because the company is earning interest on its cash reserves.
Taxes. Taxes includes any and all state, federal, and local income taxes. For limited liability companies, the number will be minimal to zero as income taxes are passed through to the individual members of the LLC.
Depreciation & Amortization. These are both relatively self-explanatory and reflect the depreciation and amortization charges on a company’s income statement.
EBITDA is a measure of cash flow for the company and helps a buyer normalize what the target company would produce in cash every year. Subtracting interest expense/income, depreciation, amortization and taxes gives buyers a method of comparing companies by eliminating the vagaries of each company’s specific situation. For example, a company may have a low net income due to high levels of depreciation and amortization but will have a high EBITDA. Buyers often talk in terms of multiples of EBITDA, so understanding how EBITDA is calculated is helpful for business owners when thinking about selling their company. As you can see, EBITDA is not a complicated calculation and shouldn’t be intimidating for any business owner.
This blog was written by Hunter Business Law Attorney David Kronenfeld.
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