Winning at Entrepreneurship. Rod Robertson

of a company’s financial performance, or cash-flow bottom line.

      Multiples of EBITDA (earnings before interest, taxes, depreciation, and amortization) valuation is the most widely methodology. As a cornerstone of the method for valuing mergers and acquisitions and seen universally as a true measuring tool, EBITDA multiplies are used on virtually any company that has revenues and earnings. But as a stand-alone tool, it is not a true indicator of value if the firm in question is doing under one million dollars in revenues. The key part of the term really is EBIT (earnings before interest, taxes), which is a good definition of cash flow, net profit, or earnings of the company. Depreciation and amortization (the DA of EBITDA) are measuring tools that add to a company’s bottom line or value on paper but are not truly cash flow numbers. Depreciation is used to add back dollars to the bottom-line value of a company that has a serious amount of equipment, trucks, etc. that have been depreciated over time. Amortization is used as an add-back also but does not truly assist in reaching smaller firms’ true enterprise value. Non-cash additions of depreciation and amortization in an EBITDA calculation can overvalue a business.

      add-back: expenses added back to the bottom line of a company’s financial statement or EBITDA; usually one-time expenses, such as owners’ compensation.

       BUSINESS REFERENCE GUIDE

      For over 20 years, BRG [Business Reference Guide] has been the essential guide to pricing businesses, providing business transaction professionals with up-to-date rules of thumb and pricing information for 700+ types of businesses.

      Most pricing entries contain:

       Rules of Thumb based on both sales and earnings (SDE)

       Pricing Tips from Industry Experts

       Benchmark information that provides comparison data

       Industry Resources such as Associations and Publications with Web sites

       General Information providing industry data, surveys, and comments

       Fascinating facts about many different businesses and industries1

      EBITDA valuation is the constant matrix initially used to ascribe a value to a company. An EBITDA multiple can range from 3 to 10. The size of the company also greatly impacts the multiple. The larger the firm, the higher the multiple as the increased bottom line and scale of operation increase the value. The smaller a company, the lower the EBITDA multiple usually is. A firm, for instance, with a $1M EBITDA could have a 4X valuation, and a similar company with a $5M EBITDA could have a multiple of 6. The increased size can make the same type of company worth virtually 30-50 percent more. This can makes sense, as the larger firm will have a bigger industry footprint and larger platform to grow quickly from. It usually would have a bigger presence in the marketplace, have the capability to grow faster and obtain growth capital, and have other sought-after attributes.

      In summary, a company’s EBITDA dollar value times its industry EBITDA multiple gives the company’s valuation.

      Vertical: short for “vertical market”; a specific industry or sector.

      Each separate vertical, or industry, has an EBITDA multiple. Within these industries, there are submarkets and sectors that have even a more refined EBITDA multiple. Most discussions involve the multiple for the company. Here is a snapshot of industry multiples for companies with $2-5M in EBITDA.