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Pricing a Business – the role of EBITDA


When engaged in pricing a business for sale we are concerned with two important numbers. EBITDA (Earnings before Interest, Tax, Depreciation, and Amortization). This figure represents the real cash flow of the business. We also will obtain a factor to multiply the EBITDA by in order to estimate the correct price range. This factor is call a “Multiple of Earnings” and we will explain this in greater depth at a later date. For now we concern ourselves with deriving the EBITA figure.

To do this we normally obtain at least a three year financial history for the subject business. For each year we will determine the net profit and then add back for Interest, Depreciation, Tax and Amortization. Once we have done this we have the EBITA for each year.

But now that we have this information how do we balance the financial result from different years. Well let’s looks at an example below. In each case we are dealing with EBTIDA for the given year.

Company A.
2011 $1,200,000
2012 $1,000,000
2013 $800,000


Company B.
2011 $800,000
2012 $1,000,000
2013 $1,200,000


Company C.
2011 $1,200,000
2012 $900,000
2013 $1,100,000


We could us an average to come up with a working EBITDA to apply to our “Multiple of Earnings”. However if we take an average of the last three years for Company A and Company B. We come up with the same figure $1,000,000. But note Company A has declining income. Company B. has increasing income. If we use the average method we come up with the same value but Company A is clearly worth more than Company B.

So in this instance we would normally use the most recent year earnings to apply to the multiple. Beyond this we would also look at current earnings to determine if the trend is continuing. If Company A is continuing to grow we would further take this factor into account when pricing the business. If Company B is continuing to decline we must also take this into account.

In the case of Company C – an average seems more appropriate. Averages can be useful when a Company exhibits zigzagging performance. Even so if we are going to average the EBITA for Company C we should weigh it so that the more recent financials are given greater weight – for example. We might apportion 15% of weight to 2011, 30% of weight to 2012 and 55% of weight to 2013.

This would give us the following result
2011 .15 x $1,200,000 = $180,000
2012 .30 x $900,000 = $270,000
2013 .55 x $1,100,000 = $605,000
Weighted average = $180,000 + 270,000 + $605,000 = $1,055,000

There are other factors that go into pricing a business. But the financial trend is probably the most important. In looking at a business we must determine the reason for declines and increases in earnings. It is important to know if these trends are due to one off events (such as winning or losing a big contract) or part of a long term pattern.

As a Business Broker we must take great care in properly pricing a business. A business that is priced too high will remain on the market longer and may not sell at all. A business priced too low may cheat the seller out of obtaining a fair price.

Anthony John Rigney PA

Anthony is a Board Certified Intermediary and licensed Real Estate Broker Associate In the State of Florida. He is currently active as a Business Broker operating out of the City of Jacksonville.

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Launch of 904broker.com

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Anthony Rigney



Anthony John Rigney PA is proud to announce the launch of his new website at www.904broker.com This new website was designed with the assistance of Mayo Media.

Please visit our site where you can learn about the process of buying a business or selling a business. We also have a Multiple Listing Service with the ability to search over 4,000 businesses for sale in the State of Florida.

Buying and Selling a Business – Documentation

Years ago, when a business was bought or sold in Florida, the paperwork associated with the transaction was anything but standard. To compound potential problems, brokers were unlicensed and unregulated. Consequently, when papers were passed across the table for signature, a buyer or seller may have had concerns about potential “gotcha’s” lurking in the forms. Sometimes, those concerns were valid. Today the “paperwork” and your broker are very different – and buyers, sellers, brokers and the industry are better for it.

The goal: No surprises. The result: No “gotcha’s” and BILLIONS of dollars worth of business sales in Florida using these documents, exactly as written.

FOR BUYERS AND SELLERS

Your broker: He or she is a real estate-licensed business intermediary, and a heavily regulated professional. The broker most likely (and you should confirm this) is a member of Business Brokers of Florida (BBF) – the professional organization for specialists in business acquisition and sales procedures, regulations, and ethics. For a short video explaining why this membership is important visit

ASSET PURCHASE AGREEMENT Forget good ol’ boy handshakes, earnest assurances and oral promises. This form is a time-tested, high-grade suit of armor that works to protect buyers and sellers from expensive surprises, misunderstandings, and possible con artists. It spells out everything – the agreement between seller and buyer, their responsibilities to each other, contingencies that must be met by each for the transaction to be completed, and what happens if a party reneges on its provisions. There are more than 40 built-in protective contingencies, and provisions for either party to add additional contingencies if desired.

LISTING AGREEMENT This document contains key details about what the Seller is offering: price, estimated value of assets, brokerage fee, financing, any pre-closing requirements, etc. Over many years, this now-standard document has been refined, reviewed by the Business Brokers of Florida, a professional association, as well as by attorneys skilled in real estate and business law.

CONFIDENTIALITY AGREEMENT Buying a business is very different from buying a house. With residential transactions, the seller is usually thrilled to see ads spelling out the address and details of the house in the newspaper, online, in a box on his lawn and, if possible, via a squadron of skywriters. Not so with the Sale of a Business. The Buyer is going to be privy to the seller’s most sensitive information – including financial operating results and perhaps tax returns. It also is critical to the seller that his employees, customers, and vendors not be aware of the intention to sell until the new owner is ready to operate the business. Consequently, you will always be asked to sign a confidentiality (non-disclosure) agreement confirming that you must not reveal to anyone who is not involved in the transaction that the business is for sale. You also agree not to disclose any of the financial or other information about the business provided during the course of a business acquisition.

FOR SELLERS

Corporate Resolution: Secretary authorizes President or other company official to sign documents. Owner Benefit Statements: Recasts financials to reflect owner benefits (combination of net profit, depreciation, amortization, interest and any other non-essential expenses that benefit the owner). Listing Agreement: The formal contract to list and market a business. Asset List: Assets are valued at current value not original or replacement cost. Transaction Broker Notice: FBX serves as a transaction broker. We represent the transaction, not the buyer or the seller. Under Florida law this is the default status. Consent of Spouse to Sell: only for businesses set up as a sole proprietorship. Exclusion Addendum: Allows a seller to exclude for 30 days any buyers he’s contacted before signing with a broker. Seller Questionnaire and Disclosure

FOR BUYERS

Non-Disclosure Agreement: Guarantees a seller that the potential buyer will not disclose any of the confidential information provided. Buyer Personal Profile: Includes financial information and background on buyer. Asset Purchase Agreement: This is the offer to purchase a business and most often includes a contingency that the buyer does not have to complete the transaction if not satisfied with results of due diligence

Is your business ready to sell?

In addition to the items mentioned in the previous posts, e.g., job descriptions, financial reports, etc., FBX believes there are several other key factors that will help sell your business. Here are some key questions to ask regarding the saleability of your business:

1. Has the business grown over the past year? Two years? Three years? Growth is good.
2. What is the forecasted growth for this year? Next year? Five years? Projected growth is good.
3. When do your customers pay you? Prior to receiving the goods or service? 50%/50%? After completion of the job? The less accounts receivable, the better.
4. Do you have a business plan? Business plans addressing all aspects of the business are good.
5. How much revenue does your largest customer generate? A diverse revenue base is good.
6. How many hours does the owner work? The less hours worked by the owner, the better.
7. How much revenue does your largest product or service generate? Again, a diverse revenue base is good.
8. How frequently do your customers buy your product or service? The more frequent, the better.
9. How incentivized is your management team to stay? Continuity is good.
10. How much employee turnover do you experience? The lower, the better.

Ten Commandments for Business Buyers

I. Thou Shall Not Be Greedy! Sellers deserve a fair price for the years they have spent developing the business. Be prepared to pay for the goodwill of the business.  

II. Thou Shall Have A Good Reason For Buying! Buying a business is hard work! It takes commitment! Spend time deciding why you want the responsibility of owning a business.  

III. Thou Shall Provide Background Information! Be prepared with a resume and financial statement. Remember, the seller will most likely be your banker and will want to know that you can run the business successfully.  

IV. Thou Shall Keep An Open Mind! There are no perfect businesses.  

V. Thou Shall Keep In Mind Tax Benefits! Remember tax benefits are realized from intangible as well as tangible assets.

VI. Thou Shall Offer A Reasonable Down Payment! A low down payment indicates a lack of commitment. When sellers question commitment, serious negotiations are in jeopardy.  

VII. Thou Shall Realize Businesses Are Priced on Profits! A business making huge profits with few assets could save you money later in capital outlay for expansion.  

VIII. Thou Shall Remember Time Is Of The Essence! After all parties have agreed upon price and terms it is important to quickly proceed toward closing.  

IX. Thou Shall Be Prepared To Meet The Landlord! Landlords usually have little to gain by cooperation. Therefore, come to meetings armed with resume and financial statement.  

X. Thou Shall Avoid Surprises! Disclose pertinent information early and avoid surprises that might destroy your credibility.

Buying or selling a business is a complex process. Make sure you have the right team on your side. Contact us today!