When marketing a business for sale, there are several numbers that every buyer wants to know. These numbers affect the value of your business and how much cash you get at closing, so it is critical to understand why they are important.
Revenue: Any successful business owner knows revenue is a key financial metric. The total amount of money generated before costs or expenses are deducted, revenue is found at the top of your income statement and reveals the general size and scale of your business, without offering any insight on profitability. Revenue trends are important. Buyers look for positive revenue growth over the past few years and ask questions around any dips. Buyers also analyze monthly revenue looking for seasonality or cyclicality in your business, which may impact valuation.
EBITDA: EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) is a common financial data point used in valuing a business; although not every business owner is familiar with this term. Calculating EBITDA requires you to “add back” a series of items to your net income – as the name implies. This eliminates non-operating expenses unique to each business, “equalizing” differences in financing sources or depreciation methods so operational profit can be compared apples-to-apples. It is important to have an accurate EBITDA number because buyers apply a “multiple” to EBITDA to calculate your company’s purchase price. You will hear this term repeatedly throughout the process of selling your business. Please see "Defining EBITDA" to gain a better understanding of this concept or call and we can help you calculate your EBITDA.
EBITDA Multiple: Equally as important as your actual EBITDA number is the multiple that is applied to determine purchase price. Multiples vary widely based on industry, size and other factors like financial trends, strength of management team, and customer concentration. As every business is unique, you are welcome to call our office for a free valuation on your company.
Margins: There is a lot of talk about margins, so which margins matter and why? For the purposes of selling your business, most focus is given gross margin and EBITDA margin. Gross margin indicates profitability, showing how much your company retains on each dollar of sales after removing only the cost of goods sold. EBITDA margins reveal equalized, net profit by adding back interest, depreciation/amortization and taxes. There can also be adjustments to EBITDA for owner discretionary expenses or extraordinary, one-time expenses. While margins vary drastically by industry and company type (manufacturing, distribution, B2B or B2C services), attractive businesses have positive gross and EBITDA margins that grow year-over-year.
Historical, Projections & Compound Annual Growth Rate: Buyers evaluate the historical and projected financials of your company using several different methods. They annualize year-to-date financials to calculate forward-looking run rates. They review the Trailing Twelve Months (TTM) of performance and historical averages of all key financial metrics (revenue, gross profit, costs, net income, EBITDA). They also calculate Compound Annual Growth Rate to assess company growth over a set period of time.
It is critical to analyze your business numbers as you prepare to market your business. The better your numbers are, the more buyers you'll have for your business and the higher the valuation will be.