By: Kelly Bond, Davis Mergers & Acquisitions.

Every business owner should have a general idea of the worth of their own business as it is good practice to keep the pulse of what is transacting in our industry. Fortunately, our data shows that over the past two years, businesses that sold based on their EBITDA (Earnings Before Interest Taxes Depreciation and Amortization) value generally transacted in the 4X-9X multiple range.  

What do those numbers mean for you?  Should the data set your expectations?

Well, it depends…

Your EBITDA is a good indicator of your operating performance. It is most often used when placing value on businesses which generate greater revenue from projects and services vs. recurring revenue. Your value isn’t just about profits or revenue, however. There’s additional nuance when decoding the potential, the intangible assets, and the story behind your numbers.

Think of your business as a puzzle – EBITDA is one piece, but other pieces include your brand reputation, customer loyalty, intellectual property, and market position. These intangibles can sometimes be the most valuable assets you own.

The key to truly understanding your business’s value is by considering how each piece interacts with the others. A high EBITDA number is great, but what’s driving it? Is it sustainable? Did your business have a one-off exceptional year? What’s your growth potential?  Are you focused on core competencies or is your business highly fragmented? 

When DMAG puts together an EBITDA value for any business, we begin by reviewing several years of financial statements and balance sheets which provide the business’ snapshot.  We consider year-over-year revenue, growth, margins, overall expenses and bottom line. We look for trends and anomalies in every aspect of the business to identify anything that would stand out prior to taking a business out to market.

Once we understand the EBITDA, we then look for the possible “adjustments” to it. A few examples of EBITDA adjustments include add-backs which are: 

• One-time costs such as those related to mergers and acquisitions, or extraordinary events like natural disasters
• One-time legal expenses
• Write-downs of assets, such as goodwill or inventory, that reflect a decrease in their value

These adjustments help to normalize earnings, offering a clearer view of the company’s ongoing operational profitability and may increase the overall number at which buyers value your company.  We do caution sellers that these adjustments can be very subjective from buyer-to-buyer and not to set expectations based on a moving target.

It is important for owners to fully understand the numbers in their business.  They should have a clear understanding of what is in their Profit and Loss statements and what is happening on their balance sheet.  Sellers should be able to clearly report on what percentage of revenue is coming from what service. Buyers will want to identify and weigh the risks of certain vertical markets and will ask for requisite detail on their largest customers. If your business is highly concentrated on one vertical, it may indicate opportunity to one buyer and risk to the next. 

What is contained in the seller’s DNA is often a scenario where beauty is in the eye of the beholder. What may be a highly valued business to one buyer may not check many of the boxes for the next. Again, it is all subjective. Location and business size can’t be changed overnight (or maybe ever) but we believe there is a buyer for every business.  

Your business isn’t just a sum of financial metrics; it’s a living, breathing entity with a story, a vision, and a future. Decoding it’s true EBITDA vale lies in the narrative your business tells—its potential, its resilience, and its unique place in the market.

If you are considering what your business might be worth, please reach out for a confidential conversation.  [email protected]

ABOUT THE AUTHOR

Kelly Bond brings over twenty-five years of industry experience to her clients. Newly inducted into the Security Sales and Integration Hall of Fame in 2024 at ISC West, she currently serves as Partner with Davis Mergers and Acquisitions Group, representing buyers and sellers of Alarm and Integration companies.

Source: snnonline.com