You may not be quite ready to sell your business yet, but if you're considering the possibility, now is the right time to start planning. As I've discussed in previous blog posts, selling your business is a process, not an event. One of the most important parts of that process is determining the value of your company.
So how do you know what your company is worth? Many deal values are simply multiples of Adjusted EBITDA, so it's critical to understand what this number is, and how to arrive at it. Here are the top 4 things you should know about EBITDA and how it relates to the sale of your business:
What is EBITDA?
EBITDA is an acronym that stands for Earnings Before Interest, Taxes, Depreciation and Amortization. EBITDA is a way to measure your company's operating performance, and is typically found on your financial statement.
What is Adjusted EBITDA?
When analyzing a company for valuation, especially during the sale of a business, Adjusted EBITDA is often used to give a better picture of net earnings. Many consider it a more accurate reflection of a company's value, and it commonly results in a higher sale price for the business.
How is Adjusted EBITDA calculated?
When calculating Adjusted EBITDA, you'll add back costs that were abnormalities, more excessive than normal, or one-time only. Some common adjustments are owner salary and bonuses, owner vehicle or travel costs, one time professional fees, litigation expenses, rent prices higher than market value, and certain travel, meal and entertainment expenses.
How will Adjusted EBITDA affect the sale price of my business?
For every dollar of EBITDA you add back, you could create 6 to 8 times that amount in sale proceeds. For example, let's say that your EBITDA is $850,000. If you determine that your sale price should be 8 times that value, your company would be valued at $6,800,000. However, if you were to adjust EBITDA to exclude an owner salary of $450,000, an owner car expense of $30,000, travel at $25,000, and add a new COO salary of $-250,000, your Adjusted EBITDA would be $1,105,000, and your company would now be valued at $8,840,000. By adjusting your EBITDA, you've increased your company value by more than 2 million dollars.
If you're planning to sell your business, understanding your Adjusted EBITDA will be critical to helping you structure the deal. Your CPA can help you determine some acceptable adjustments, ensuring that you get the most value for your company. If you have any questions about Adjusted EBITDA or selling your business, leave a comment below, or feel free to contact me anytime.