Business Valuation for M&A – How to Improve Your EBITDA

Every business owner planning to sell their company aims to get the highest value at the time of the sale. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) is a tool that can help do just that. However, as with any financial adjustment, you need to proceed with caution and do it correctly to maximize your profits and keep the acquisition moving forward.

EBITDA adjustments take two types of expenses into account: the expenses that won’t repeat in the years following the sale of your business and expenses that are not already appearing on your income statement. By making these adjustments, you can improve your business value.

Here are some typical EBITDA adjustments that can help improve the value of your business during an acquisition:

Executive Compensation – An owner’s salary and bonuses may be higher than market value if the business has been owned for many years. To make an EBITDA adjustment, you need to determine the cost of your replacement by factoring the difference between your salary and market value.

Personal Owner Expenses – In a private business, it’s common practice for some personal expenses to run through the business. This can include club memberships, sporting team tickets, a family member who works for the business and other similar scenarios. Since these are not likely expenses that the buyer would pay following the acquisition, they would be removed from the calculation of EBITDA.

Non-recurring fees – These fees may include marketing programs or promotions that end in that current year, legal or settlement costs, fire or theft loss, moving expenses and other similar expenses. Be sure to talk to your advisor to determine which non-recurring fees you should include in your adjustments to EBITDA.

Lease Expenses – Depending on whether you are paying below or above market value, this can work both ways as a positive or negative adjustment.

Investments – Investment expenses may include on-site infrastructure improvements, machinery or equipment, technology and software. Extra caution is required when considering these expenses. Adjustments for investments should be made to recognize the expense over the life of the investments.

Working closely with a valuation advisor on adjustments to EBITDA is highly recommended in order to maximize your opportunity and also to ensure that the buyer is going to accept the adjustments as fair. Taking too many adjustments can adversely affect the sale of your business. Remember, EBITDA is a helpful tool used to assess the market value of a business, but it is only one factor in the M&A marketplace.

If you are unsure about the value of your business, a business valuation provides you with a road map to enhance the business’ worth. It’s a planning tool that can help define your strategy and provide peace of mind for your future.

Our Business Valuations group can help you understand applicable adjustments to EBITDA for your M&A situation. Based on your needs and goals, we can also provide a full valuation or a simpler calculation of value. We can help you understand what your valuation means and any issues that could improve or impact that value. Contact Ryan Campbell or Andrew Labosier at 256-533-1040 to schedule a time to discuss your company valuation needs.