In a recent workshop Perry Phillips, president of ESOP Builders (www.esopbuilders.com) and the co-author of the $10 Trillion Opportunity, shared a very interesting insight. In essence he was saying that generally the higher your EBITDA, the higher your multiple.
EBITDA stands for Earnings Before Income Taxes, Depreciation and Amortization. While it’s not the only way to value a company, this is a common accounting mechanism, used to assess the value of your business. In very simple terms (because I’m not the technical guy) it means taking your net earnings before income tax, adding your depreciation and amortization costs and coming up with a number. So your earnings might be $400,000 but your EBITDA might be $650,000. This number is then multiplied by a number (multiple) of somewhere between two and seven, depending on many factors.
Obviously you’d like to get a multiple at the high end of that scale!
But here’s why it’s so important to get your EBITDA up: it’s a double win! Increasing the EBITDA also tends to increase the multiple number used to calculate value.
According to Phillips, if you had an EBITDA of $1 million you might get a multiple of 4 times to come up with a valuation of $4 million. But the same company with an EBITDA of $2 million might get a multiple of 6 to arrive at a valuation of $12 million!
So, the message I got from that is that it is well worth your time to get focused on your EBITDA now, and look for ways to drive that number up.
Hmmm, increase your earnings now and get paid more later as well. Seems like a worthy goal! In my book, The Business Transition Crisis, you’ll find 12 factors that you have control over that can increase your EBITDA.