Success in Small Business: What does your path to success look like? by Rechnitz Deborah

Author:Rechnitz, Deborah [Rechnitz, Deborah]
Language: eng
Format: epub
Published: 2020-08-27T00:00:00+00:00

Valuing the business

EBITDA is just one of many acronyms being used today. If you recognize these letters, can recite their definitions, know the results for your own operation, and how you compare with other similar companies then go and read a different section. Otherwise, read on.

EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization. In other words, it is a measurement of available cash flow for a company. The difficulty in comparing this information with other companies is all the unique aspects that exist in a private company. Rents for properties personally owned may not be paid at market-based levels, which may overstate or understate the EBITDA. Owner’s salaries may also not be at market-based levels based on work performed and the cost of finding a substitute to perform the job functions. Estimates can, of course, be made but, at least a company can track its own EBITDA without adjustments and calculate whether the current year’s results as compared to those of the prior year have improved or not.

EBITDA or some measurement of available cash flow has been and will continue to be a method of valuing the business for estate planning and for ultimately selling the business as an exit strategy. A pricing multiple of anywhere from two to six may be available for businesses in slow growing industries. For instance, if your EBITDA is $250,000 per year and you are offered a multiple of four, then the value of the business is $1,000,000. The range of multiples is based on a variety of factors such as market share, price structure, long-term leases, historical sales growth, experienced management in place, future growth opportunities, and other similar factors. There is no right or wrong number, only a willing buyer and a willing seller who agree on a price.

Summary

There are a variety of tools available to small businesses which provide you easily accessible data and comprehensive information for better decision making. Growing from your “seat of the pants” management to a dashboard is the first step. Examining the proper operational measurements help to anticipate the monthly and annual financial results with few surprises. Having a budget with operational goals integrated into the dashboard allows constant focus on the data most critical to the organization.

Use these tools to help keep you and your staff focused on the big picture. Having too many measures can confuse or distract. Having too few measures can result in a company falling into disrepair before anyone notices. We’re after just the right number of measurements.

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