What is EBITDA? What Should You Know About It?

What does EBITDA stand for? It stands for earnings before interest taxes, depreciation, and amortization and it is used to assess the performance of a company. When selling a business, you want to put your best foot forward and look as attractive as possible to the buyer. Allow us to lead you through the details via this video “What is EBITDA? What Should You Know About It?” so you can be better prepared to sell.

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EBIDA is earnings before interest taxes, depreciation, and amortization. For many sellers and purchasers, EBITDA is relied on to assess whether a business price is fair.

These sellers and buyers take the purchase price, divide it by EBITDA and come up with a multiple of the purchase price to EBITDA. It is a simple calculation but focusing on the EBITDA multiple in isolation is troublesome.

EBITDA does not take into account capital expenditures and working capital requirements and other cash flow items that buyers should not ignore. Sellers need to be aware that purchasers will be thinking of capital expenditures, working capital requirements and cash flow items in addition to the price they pay for the business.

Businesses that are fixed asset intensive such as manufacturing and trucking require heavy ongoing investments in plant and equipment. Sellers need to be realistic in that purchases will recognize that continued investment in plant and equipment will continue under their new ownership and this will impact the value of the business and the price they are willing to pay.

Working capital is like the gasoline for your car’s engine. You want to go faster, you need more gas. You want your business to grow bigger and have more sales? You need more working capital.

How do you as a potential seller factor working capital and EBITDA factor into selling your business? Get a thorough valuation of your business completed that includes anticipated Capital Expenditures and Working Capital Requirements.