Last time we discussed the fact that since the Great Recession, commercial banks have become asset-based lenders. This is a negative development to the business seller since most business sales require a buyer to pay a premium over asset value. Sellers correctly expect to be compensated in the purchase price for goodwill, also referred to as enterprise value and unflatteringly as blue sky or air ball.
When the time arrives to transition your business to new owners, the first step is for you and your advisors to arrive at a price which both meets your expectations and will be accepted by prospective buyers. Step two is a frank discussion about how potential buyers might receive necessary bank financing to consummate the purchase of your business.
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is an accounting term used to measure the profitability of a business before expenses for interest, taxes, depreciation and amortization. I am often asked by business owners, “What multiple of EBITDA should I use to determine how much my business is worth?” If your business is an owner-operator enterprise, the answer is generally, “EBITDA should not be used in the valuation of your business; SDE (seller’s discretionary earnings) is the figure that matters.”