First, what does EBITDA stand for?
By definition, it means “earnings before interest, taxes, depreciation, and
amortization.” The EBITDA margin provides investors with a quick overview
of the short-term efficiency of a business.
Why is this an important factor when selling my business?
Because the EBITDA does not include non-operating costs such as interest
expenses, taxes, or intangible assets, the result is a calculation that reflects
the company’s operating profitability more accurately. Investors want to
know how profitable your business can be.
How do you determine if my EBITDA is good?
First, you must calculate the margin by dividing the EBITDA by the total
revenue.
EBITDA Margin = EBITDA/Total Revenue
The total from this calculation will show the cash profit a business makes in
a year. The bigger the number, the more profitable a company is.
Here is an example:
Company A has an EBITDA of $600,000 with a total revenue of
$6,000,000. This company has an EBITDA margin of 10%.
Company B has an EBITDA of $840,000 and total revenue of $10,000,000.
This company has an EBITDA margin of 8%.
Even though Company B is showing a higher EBITDA than Company A
(8% versus 10%), an investor will see more potential in Company A.
To help you calculate your business EBITDA, download our free template
HERE, input a few data points from your income statement, and see the
results. If you have any questions or need assistance gathering your
information, we’d be happy to walk you through the process. Once you
know what your EBITDA is, this will assist in evaluating what your business
is worth to an investor.
For more information, contact John Armentano today at 914-420-2933.
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