In the M&A and sell-side market, EBITDA is a very helpful tool for assessing a business’ market value and marketability.
EBITDA is a financial indicator (an acronym for “Earnings Before Interest, Taxes, Depreciation and Amortisation”) that provides a true picture of what the company is earning or losing in terms of core business, without considering financial and tax aspects. It can be a useful tool for comparing the financial strength of two or more companies, as well as for determining the market value of your company when you are considering selling it.Normalised EBITDA means that it has been adjusted to remove income or expenses that would not be present under new ownership. Examples might include dividends disguised as expenses (invoices to partners) or the owner’s €1 million salary, when the fair market value of the job might be €75,000.
However, the calculation of EBITDA does not take into account factors that could influence the future growth and prosperity of the company. A key concern in using this concept is that it is often used as a substitute for true value – when in fact a “true value” does not exist for any business. One must remember that profit, the owner/seller’s discretionary earnings, EBITDA and cash flow are never the same number. All of those have different uses in determining a business’ market value.
In the end, taking into account EBITDA and the myriad other value drivers help buyers and sellers recognize the value of the subject business en route to a successful closing and transition.