At some point in the lifespan of your business, you are probably, going to want to sell it off. Therefore you should try to design and maintain your business in a way to maximize that eventual sale. And buyers are going to be interested in a business that’s both profitable and built to last.
One way to start measuring your business’ value is through determining your EBITDA. Your EBITDA is your business’ earnings before interests, taxes, depreciation, and amortization. What you do is subtract your expenses from your revenue (don’t include your interests and taxes) without depreciation and amortization (which is what you pay for tangible & intangible assets). The remaining amount will give you a simple picture of your business’ profitability, debt, and free cash flow.
You can also get a more accurate reading of your free cash flow by subtracting out your new capital expenditures. Once you get this dollar amount, simply build upon the foundation to see how well you are doing.
Although EBITDA is a helpful value assessment, you still need to depreciate and amortize assets, as putting those charges back into earnings may actually give you an unrealistic measure. Hence the need for adjustments. Since EBITDA does not conform to generally accepted accounting principles, you can make these adjustments wherever you see fit, but you may need to devalue assets like old equipment within the overall number or add both tangible assets (such as equipment) and intangible assets (employees) to your figure.
Generally speaking, through this addition process you actually arrive at your business’ value as a multiple of EBITDA. The multiple is called “field” EBITDA, taking into account subsidiaries and components of your business that can be absorbed for very little cost. You may have heard this term applied to the selling the business to another business in a similar field, where the management team, office space, and other business expenses subsequently “go away” during the acquisition and merger.
There are other variables and measurements that factor into your company’s worth that can also figure into your calculations. For example, you could approach potential buyers in your niche in order to gauge interest, then redesign your business so that the redesigned areas can “pump up” your multiple of EBITDA.
You also need to decide which year’s EBITDA are that you are using for valuation: the current, past, projected, or a combination of some sort. To get the highest valuation, you’ll probably want to bolster your gains in the present and future. In order to do so, you must 1) be sure to exceed your business plan and monthly goals, 2) create a solid sales stream into next year, and 3) get clients on-board with long-term contracts.
Finally, EBITDA shouldn’t be the only consideration when it comes to your company’s value. Be sure to factor in capital expenditures, synergies, and other financial accruals with the help of your accountant.