Rich and Co.

M+A Advice: You Need a Valuation and EBITDA is Not Everything

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Take Aways –

  • Get a valuation by someone who knows the business/industry
  • A solid EBITDA really needs growth to drive profits and ROI.

As you start to think about getting liquidity from your life’s work to fund you and your family’s retirement and your estate, let us share some experiences.  First some cautions:

  • Your Have Not Planned — You are very good at planning and executing for your day to day business but probably have not done near the same for you transition.  Right?  For example, the first question we ask — “Have you talked to your spouse and family about what they expect from a transition?”
  • You Do Not Know the Fair Value — Your operational books and accounts are in good shape to run the business but not optimal to value the business or present a fair value pro forma.
  • EBITDA is Not Everything — Operational efficiencies, represented by EBITDA, are important but you likely have that down.   Other business processes and resources are probably more important in the value to a partner or acquirer.

Start with a valuation.Chances are your current bookkeeping and accounting system will not easily produce the kind of reports needed to do this.  In addition, you need someone who knows the business take a dispassionate, critical and balanced view of the assets and resources of your firm.

In most cases, when we do this work — our clients have undervalued their businesses.  Mainly because they ignore the important but subtle assets related to growth potential.  Can you value growth potential?  That is what the best partners and buyers want to invest in.  That is where their ROI will come.

We will do another post on the value of growth resources but — where does McDonalds derive it’s value?  From making cheap burgers or from the global real estate/points of sales, name recognition and marketing smarts, supplier relationships, local market knowledge, people?

By definition, the major components of EDIDTA are commodities and easily replicated and scaled up.  They rarely different a business.  Since they are largely mechanical — they are easily copied and managed.

A solid EBITDA really needs growth to drive profits, equity growth and ROI.


Written by Rich and Co.

September 18, 2012 at 6:20 pm

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