Web Exclusive: EBITDA and company value
September 6, 2017
September 6, 2017
Every pest management company has characteristics and traits that drive its value. Five factors may lead to a bigger payoff when it’s time to sell:
- Having a business someone wants to own.
- Sustaining revenue growth.
- Retaining quality employees.
- Operating bigger than you are.
- Showing profitability or EBITDA.
EBITDA stands for earnings before interest, taxes, depreciation and amortization. If you have a desirable business, it arguably is the single greatest characteristic or metric that translates value.
When applying rumored valuation multiples to their own revenue streams, sometimes business owners fall victim to significant misconceptions of value. While revenues do hold relevance, they generally do so second to profitability.
There are two important additional points concerning EBITDA. First, within the exercise of valuation, determining EBITDA is not as fundamental as summing up operating profit, interest, taxes, depreciation and amortization. There is a degree of subjectivity that factors into the calculation. The objective ultimately is to arrive at an EBITDA figure that represents what the business would generate if it were being operated solely for the benefit of the business as opposed to serving discretionary needs and desires of its owners. To this end, there usually will be other expenses added to arrive at an EBITDA figure upon which a valuation multiple is applied.
Second, as with most valuation principles, there can be anomalies when it comes to assessing the relationship between a company’s current EBITDA and its market value. In other words, a company may have a low EBITDA percentage (by industry standards) relative to the value the market places on it. This doesn’t mean, however, that EBITDA is any less important of a factor in this type of instance. To the contrary, it most often means that the particular buyer sees a clear and direct path to a higher and more acceptable level of profitability within a reasonable time frame. This likely means that there is something the buyer can, or is going to, do to generate that profitability, which hasn’t already been done. But the significance of EBITDA remains paramount.
Lance Tullius is president of LR Tullius, which provides merger and acquisition and financial/strategic advisory services to companies operating in select industries. You can reach him at Lance@LRTullius.com.