Understanding Ebitda's Importance in Business

I see a ton of posts on what EBITDA 𝘪𝘴, but how about 𝘸𝘩𝘺?? Start with, it's an approximation of the profitability / operating cash flow of a business. This operating cash flow serves as a basis for valuation and will be multiplied by some kind of multiple. For example, $1,000,000 EBITDA x 8.0x = $8,000,000 valuation. (the 8.0x is determined in the market by looking at comparable transactions for similar companies) The key thing here: every $1 dollar of EBITDA is worth $8 dollars (at least in this example). So you can imagine a seller wants the EBITDA as high as possible, whereas a buyer wants it as 𝘳𝘦𝘢𝘴𝘰𝘯𝘢𝘣𝘭𝘦 as possible (too low won't attract buyers in the first place). ——— Okay, got it, so 𝘸𝘩𝘺 do we include what we do? We start with Net Income, and that's easy enough, that is the "profit" or "earnings" of the company after all. But Net Income 𝘪𝘴𝘯'𝘵 cash, we have to adjust it to get the (approximate) cash. Let's do the easy ones first: Depreciation & Amortization. Those are 𝘯𝘰𝘯-𝘤𝘢𝘴𝘩 expenses, and we're trying to build an approximate operating cash flow. So we "add-back" those expenses to Net Income. ——— The next one is a little trickier, Interest. Why Interest? Because a company could be purchased with all equity and wouldn't need any debt, and therefore wouldn't have Interest Expense. So we "add-back" the Interest Expense to show what it would look like "debt free." ——— Next one is even trickier, Taxes. Don't we all have to pay taxes? So why add this back? It all comes down to the business structure. There are several business structures known as pass-through entities, meaning there is no "corporate income tax." Rather, the taxes are "passed through" the business and end up on the personal returns of the members. Typical pass-through entities would be S Corps, Sole Proprietorships, LLCs, and Partnerships. The structure that is 𝘯𝘰𝘵 a pass-through is a C Corporation. This type of business would show an income tax expense on it's income statement (whereas the other types would not). So, that is why it gets added-back -- we are showing a "tax-neutral" view of the business knowing that its business structure could change as part of an acquisition. ——— In Summary: Net Income = GAAP Profit (+) D&A = neutralizes depreciation policies and are non-cash expenses (+) Interest = neutralizes capital stack (+) Taxes = neutralizes corporate tax structure = EBITDA = a figure we can now compare to similar companies ——— 📩 𝘱.𝘴. 𝘪𝘧 𝘺𝘰𝘶 𝘭𝘪𝘬𝘦𝘥 𝘵𝘩𝘪𝘴 𝘱𝘰𝘴𝘵, 𝘵𝘩𝘦𝘯 𝘴𝘪𝘨𝘯 𝘶𝘱 𝘧𝘰𝘳 𝘮𝘺 𝙛𝙧𝙚𝙚 𝙚𝙢𝙖𝙞𝙡 𝙨𝙚𝙧𝙞𝙚𝙨 𝘵𝘩𝘦 𝘍𝘪𝘯𝘢𝘯𝘤𝘪𝘢𝘭 𝘔𝘰𝘥𝘦𝘭𝘪𝘯𝘨 𝘌𝘥𝘶𝘤𝘢𝘵𝘰𝘳. 𝘛𝘩𝘦 𝘭𝘪𝘯𝘬 𝘪𝘴 𝘪𝘯 𝘵𝘩𝘦 𝘤𝘰𝘮𝘮𝘦𝘯𝘵𝘴 𝘣𝘦𝘭𝘰𝘸.

EBITDA isn't just another acronym. It's your lifeline in the financial storm. What happens when you ignore EBITDA? You're drowning in data, making decisions based on incomplete information. I've been there. Let me tell you a story. I was running a startup.  Revenue? Soaring.  Profits? Nowhere to be seen. I was ready to cut essential resources. Big mistake. Then I discovered EBITDA. It told a different story. Our core business was thriving.  High depreciation on recent investments was the culprit. EBITDA saved us from a costly error. So, what's EBITDA's superpower? 1. It strips away the noise. 2. Shows your true operational performance. 3. Let's compare apples to apples with competitors. 4. Highlights areas for improvement. 5. Attracts investors by showcasing real earning potential. How do you harness this power? → Calculate EBITDA regularly. → Compare it to industry benchmarks. → Use it alongside other metrics. → Let it guide your strategic decisions. By mastering EBITDA, you're not just doing accounting – you're providing strategic insight that can drive your business forward. #ebitda #businessaccounting #finance

Since many business owners are ashamed to ask, I’ll do it. What is EBITDA, and why should I care. As a business owner, you’ve probably heard the term EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). But what is it that makes EBITDA so important? EBITDA is a key financial metric that helps you and potential buyers assess your company's real operating performance – without the influence of certain financial and accounting decisions and sometimes hide what’s really going on. Specifically, it excludes: 1. Interest: Reflects financing costs and debt structure, which vary widely between businesses. A potential buyer might not have to make these payments, so they want to know how much the business earns without taking the interest payments into account. 2. Taxes: Impacted by varying tax laws and strategies, but not indicative of operational efficiency. How much you pay in taxes is a function of how you (and your accountant) report on your business. You might pay more or less given the same earnings depending on what you want to accomplish (believe it or not, there may be perfectly good reasons to pay more taxes than less). 3. Depreciation and Amortization: Non-cash expenses related to capital investments and intangible assets, which can distort the view of actual operational performance. Essentially, these expenses don’t cost you cash. You want to report these to lower your tax burden, but they also appear to lower your earnings – despite not having actually making any payments to anybody. By excluding these factors, EBITDA provides a clearer picture of your business’s profitability by focusing on core operations. Here’s why knowing your EBITDA is essential: 1. Benchmark Performance: It allows you and future buyers to compare your business with others in your industry, regardless of differences in capital structure or tax situations. 2. Investment Attractiveness: Investors and buyers often look at EBITDA to gauge a company’s value and potential for growth. A strong EBITDA is an important factor in making your business more attractive to potential buyers. 3. Operational Insights: Regularly tracking EBITDA helps you understand the health of your business operations and identify areas for improvement. It’s a powerful tool for making informed strategic decisions. 4. Growth Planning: Knowing your EBITDA aids in planning for future expansions, securing loans, or planning exits. It provides a solid foundation for forecasting and financial modeling. Focus on your EBITDA to unlock insights that can drive your business forward. It’s not just a number—it’s a pathway to sustained growth and increased business value. #businessowner #entrepreneurship #success #strategy

Running a business without tracking EBITDA. Why would you take that risk? I remember working with a manufacturing client who couldn't understand why profits were down despite increased sales. Their tax structure and debt financing masked the operational improvements they'd made. Once we implemented EBITDA tracking, they finally saw their core business was actually thriving. Likewise, I've watched businesses transform once they started tracking EBITDA. Suddenly, they could: • Secure better financing terms • Compare performance across locations • Identify their most profitable product lines • Make evidence-based investment decisions Without EBITDA, you're making decisions based on incomplete information. That new product line?  That cost-cutting initiative?  You have no way to measure their true impact. Whereas, your competitors track EBITDA. They're confidently making strategic moves based on clear operational insights. They know exactly where to invest for growth. You need the confidence that comes from truly understanding your operational performance. #ebitda   #finance  #businessgrowth