Tuesday, 22 January 2013

How Much Is My Business Worth? - Understanding EBITDA

EBITDA And The "True" Value Of Your Company

People often talk about selling a business and say, "I sold my business for five times" or “I want six times for my Company”. The first thing I always think is "Five or six times what? PBIT (Profit Before Tax), Gross Profit, Turnover?” Of course the most common method to value a Company in the SME market, and the one savvy Vendors will be aware of, is EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation), but even then the majority of Vendors and Buyers are unaware there are variations of EBITDA. When Brokers and Advisors talk about EBITDA this is the figure calculated based on the last set of filed Accounts. However there is also TTM (Trailing Twelve Months) EBITDA which is calculated based on management accounts and recent financials, as well as NTM (Next Twelve Months) EBITDA which is based on forecasts and projections. Each one of these EBITDA definitions will calculate significantly different valuation figures, so it is vital to ensure the correct method is utilised to maximise the amount you receive from a sale.

When asking "How much is my business worth?", here is a valuation tip to help you achieve or exceed your value expectations:

Calculate Your Implied Valuation Multiple

Similar to Sellers bragging about selling for high valuation multiples, Buyers like to boast about how they got a great deal, paying a low multiple. As a Seller this is something you can use to your advantage, remembering that the end goal is to get the highest total purchase price, not the highest multiple. By knowing your Buyers you can calculate the valuation multiple based on various metrics to find - and show - the one that's the lowest. 

For example let's say that your business has an EBITDA for the last fiscal year-end at June 30th 2012 of £500,000. Today is January 31st 2013, and your TTM EBITDA has increased to £600,000. The Company is continuing on an upward trend with increased clients and volume of sales, and will reach NTM EBITDA of £800,000 by June 30th 2013. If your valuation expectation is £2.5 million, then the implied valuation multiples are:

• 5x Last Fiscal Year EBITDA
• 4.16x TTM EBITDA
• 3.125x NTM EBITDA

So, what I tend to do is help potential buyers find the lower EBITDA multiple so that they can go to their board of directors, investors and other stakeholders glorifying that they got a bargain deal for your Company by only paying 3.125x - even though it's really just a different way of portraying the same valuation. 

Adam Croft, Senior Business Broker

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