EBITDA: An Outsider Look

EBITDA: An Outsider Look

by Laura Kevghas, Partner at Mirus Capital Advisors, Inc.

As a business owner, you’re probably used to measuring your financial results based on revenue, gross margin and net income.  But when a potential acquirer looks at your business, they are frequently interested in EBITDA – Earnings Before Interest, Taxes, Depreciation and Amortization.  It is generally calculated like this:

Operating Income
+ Depreciation
+ Amortization


Earnings Before Interest, Taxes, Depreciation & Amortization

In privately held businesses, operating expenses are sometimes artificially high because of expenses that the business owner runs through the business, which would not be incurred by a third-party buyer. This could include leases on your and your spouse’s high end Mercedes, payments to children who aren’t actually working in the business, travel & entertainment expenses for that trip to Paris that included a one day business meeting followed by six days of fun, payments on the yacht docked in Boston Harbor, etc.  You can also add back excess compensation (wages) paid to you as the owner, but be careful with this add-back, because the buyer will expect that you will be willing to work for them at that rate post-closing during the transition period.  When presenting your financial results to a potential buyer, you’ll want to add back these expenses and present “adjusted EBITDA” numbers. (During due diligence, you’ll need to be prepared to show evidence that these add-backs are reasonable and the amounts are accurate.)

When an investment banker talks about your business being sold at a certain “multiple”, that multiple is typically applied to your adjusted EBITDA.  However, EBITDA is a proxy for free cash flow, so if the amount you need to spend each year on capital expenditures is significantly different from your depreciation and amortization expenses, then it may not be a good proxy, and you’ll see multiples applied to your free cash flow instead.

However, if you want to make competitors jealous when you chat at industry events or impress your friends on the golf course, divide the purchase price you received by your net income, and tell them that’s the multiple you got paid.  They’ll be impressed at the great deal you made!

Laura Kevghas is a partner at Mirus Capital Advisors, Inc.  Mirus is a middle-market investment banking firm serving the mergers and acquisitions and valuation needs of New England companies with revenues between $10 and $150 million.  Laura has completed more than fifty transactions over her 25 year career, and works primarily with companies in the staffing, training and technology sectors.

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