If you are like most business owners that I work with, you want to know what your business might be worth. You probably have lots of questions. What is EBITDA, and why is it important? Moreover, what are acquirers paying for companies like yours these days.
A little internet research will probably reveal that a business like yours trades for a multiple of your pre-tax profit. For small businesses, this is Sellers Discretionary Earnings (SDE). For slightly larger businesses it is called Earnings Before Interest Taxes, Depreciation and Amortization (EBITDA).
Obsessing Over Your EBITDA Multiple
This multiple can transfix entrepreneurs. Many owners want to know their multiple and how they can jack it up. Assume your business has $500,000 in profit. If it trades for four times profit, it’s worth $2 million. Alternatively, if the same business trades for eight times profit, it’s worth $4 million.
Obviously, your multiple will have a profound impact on the haul you take from the sale of your business. But there is another number worthy of your consideration as well: the number your multiple is multiplying.
How Profitability Is Open To Interpretation
Most entrepreneurs think of profit as an objective measure, calculated by an accountant. However, when it comes to the sale of your business, profit is far from objective. Your profit will go through a set of “adjustments”. Each is designed to estimate how profitable your business will be under a new owner.
This process of adjusting—and how you defend these adjustments to an acquirer—is where you can dramatically spike your company’s value.
Let’s take a simple example to illustrate
Imagine you run a company with $3 million in revenue and you pay yourself a salary of $200,000 a year. Further, let’s assume you could get a competent manager to run your business as a division of an acquirer for $100,000 per year. You could safely make the case to an acquirer that under their ownership, your business would generate an extra $100,000 in profit. If they are paying you five times profit for your business, that one adjustment has the potential to earn you an extra $500,000.
You should be able to make a case for several adjustments that will boost your profit and, by extension, the value of your business. This is more art than science. Prepare to defend your case for each adjustment. It is important that you make a good case for how profitable your business will be in the hands of an acquirer.
Some of the most common adjustments relate to rent (common if you own the building your company operates from and your company is paying higher-than-market rent), start–up costs, or one-off lawsuits. Also, insurance claims and one-time professional services fees account for adjustments to EBITDA.
Your multiple is important. However, the subjective art of adjusting your EBITDA is critical. It is where a lot of extra money can be made when selling your business.
If you would like to have a conversation about preparing your business for sale, I would be happy to have a cup of coffee or phone call. Please contact me at 317-513-4016 or reach out by email at JeffFarren@b2bcfo.com.