Using EBITDA to Strike a Deal
There are a number of factors that play when assigning a value to a business, including a mix of SWOT analysis and historical financial performance.
One indicator of this financial performance is EBITDA — Earnings Before Interest Depreciation & Amortization, which allows businesses to reach a solid starting point in measuring the potential value for an injection of capital or even a sellout.
EBITDA = Operating Profit (EBIT) + Depreciation (D) + Amortization (A)
#1 TIP: Minimize non-operating effects and it will balance the liquidity scale towards operating profitability as the “one” measure of performance.
#2 TIP: Push towards a low valuation (average company EBITDA as base number) to grasp the buyer/investor attention at: “Ok, why are you so conservative?”, or “I rather buy your product.”
#3 TIP: Push towards a high valuation (point out to the non-operating effects that turn-up the operating profit scale). How? Stick to revenue-costs only. Show an opening balance sheet for the potential growth-stage ensuring that the audited financial statements demonstrate the investment output– including the costs on the cap tables if necessary.
Striking a Good and Fair Deal it matters only on two elements: #1 A solid but realistic strategic plan (showcases background and performance) and #2 Confidence (on the future investor that will serve not only as the financial supporter but a partner.)