The Essential EBITDA Tutorial - What is “EBITDA” anyway?
You met with a bank today to discuss a loan and one word (or rather an acronym) keeps ringing in your ears as you’re trying to go to sleep: EBITDA (pronounced: “Eee-bit-daah”)! The banker just kept saying it over and over. You took a few business classes in college and never once heard a professor utter this word. But whenever you interact with financial people these days, it seems like the only word they know.
If you’re wondering how this came to be you’ll have to Google it, but considering it’s now a fixture in business life, let’s talk about it.
EBITDA is an acronym for Earnings Before Interest, (Income) Taxes, Depreciation, and Amortization. You won’t find it listed on standard company financial statements, but you can calculate it from them. EBITDA is a very rough calculation of the cash flow generated by your business operations.
When it comes to selling debt or equity in your business, it’s important to note that EBITDA comes in many flavors and will be a critical metric in any discussion.
Types of EBITDA
There are several different types of EBITDA:
Calculated EBITDA - this is the straightforward calculation discussed above.
Bank EBITDA - this metric includes adjustments required by your lending institution (e.g. excluding non-cash gains). If you are in a banking relationship where you report monthly or quarterly metrics (e.g. Fixed Charge Coverage and Leverage), this is where you might see Bank EBITDA used.
Seller’s Adjusted (or Normalized or Run Rate) EBITDA - this is the number you would prepare as a seller to market the company to investors. This figure takes Calculated EBITDA (traceable to the financial statements) and adds back (or deducts in some cases) amounts to get to the “real” figure after you adjust out all of the stuff you want the buyer to ignore. This may include one-time expenses, personal expenses, excess compensation, the impact of contract changes, etc.
Recommended Read: Words Matter: Positioning Your Business to the Market
The Importance of a Clearly Articulated EBITDA Story
A defensible Seller’s Adjusted EBITDA is absolutely critical to maximizing the selling price of your business. Every dollar of additional EBITDA credit that you can convince a buyer to accept means a multiple of that dollar in purchase price. This could be anywhere from 2x to 20x that dollar in purchase price depending on the specific industry, company, etc. Most saleable businesses can expect to sell in the 4x to 8x range, unless they have a really unique story (e.g. 50%+ growth rates).
The more pristinely you can document your adjustments, the more likely you are to convince a buyer to accept them.
Recommended Read: What's Your Business Worth?
At Doescher Group, we specialize in helping owners exit on their own terms. In some cases that means preparing them for sale, while in others it means helping them implement a growth plan, or recover from a difficult period. In all of these cases, there could be a need to interact with the capital markets. If this sounds like you, one of our strengths is bringing your financial reporting to a best-in-class level to help you achieve your goals. Reach out to us today to learn more.
