Many practitioners in business, finance, accounting, and valuation circles make reference to EBITDA; a metric that is both intriguing and controversial. EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is a measure of a company’s pre-tax operating cash flow before deductions for capital expenditures or debt service requirements.
EBITDA is a common valuation parameter used by appraisers in valuing businesses. The perceived fair market value is often stated as a capitalization multiple of this number. When we read that the value represents a 5.0 times multiple of EBITDA, what it really means is: the invested capital of the business (debt plus equity) is equivalent to five years of EBITDA (measured either as an average or as a single-year).
It is also important to remember, since EBITDA is calculated before interest expense, the resulting capitalized value indication is for invested capital. Thus, interest-bearing debt must be deducted to determine equity value. Excess cash or excess working capital are often added in determining equity value based on an EBITDA multiple.
VAVA Inc. relies on this analysis as one of many valuation parameters utilized. Please contact Van Amburgh Valuation Associates Inc. and we can develop strategies for maximizing EBITDA and business value. Call (972) 723-9500 (Texas) or (919) 964-8423 (North Carolina).