Comments on: Business Valuation 2 – EBIDTA can eat my shorts…

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By: The fundamentals of Buying, Building, and Selling a business « Ethical Business Builder’s Weblog

Sun, 15 Nov 2009 19:59:41 +0000

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By: Profits vs. Cashflow - Do you really know the difference? « Ethical Business Builder’s Weblog

Wed, 05 Nov 2008 17:14:03 +0000

[...] ethical with both if we want the best for ourselves and business. Your banker will often look at EBITDA so that your non-cash expenses won’t hurt the “profits” they consider, but [...]

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Fri, 03 Oct 2008 05:12:33 +0000

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By: My best investment ever! « Ethical Business Builder’s Weblog

My best investment ever! « Ethical Business Builder’s Weblog — Sun, 10 Aug 2008 19:38:38 +0000

[...] mind, you better spend time educating yourself on EBITDA and Free Cashflow calculations. EBITDA, as I’ve pointed out, is a bit of a farce, however Free Cashflow times some arbitrary multiplier is more [...]

By: ethicalbusinessbuilder

ethicalbusinessbuilder — Fri, 23 May 2008 00:15:46 +0000

As a follow-up to this discussion, I’m in the process of looking at another business and this time its being listed through a business broker. So guess what formula the business broker and his client used to value the business??? EBITDA. Along with the scientifically determined 3 times multiplier . Again, I’m not saying I’m an expert in business valuations, but everyone who claims to be sure loves their EBITDA (except for you Harry, and I appreciate that).

By: Harry Hvostov

Harry Hvostov — Sat, 08 Mar 2008 08:13:59 +0000

Some comments:

Business valuation under the income approach can be done by capitalization (using multiples of SDE or Net Cash Flow) or discounting, using a stream of income.

Check out when these methods yield similar and different results at:

http://www.valuadder.com/valuationguide/business-valuation-capitalization-discounting.html

As an aside, most CPAs and bankers are not skilled in business appraisal. Business appraisal is a field of applied economics, not financial reporting or lending.

You do find EBITDA as a basis of business value estimation under the market approach, especially for publicly traded firms. As mentioned before, this is more reliable since these companies must comply with GAAP financial report guidelines, unlike closely held firms.

By: Harry Hvostov

Harry Hvostov — Sat, 08 Mar 2008 07:04:20 +0000

Under the income approach to valuing businesses, the cash flow can be either capitalized or discounted. The direct capitalization methods are what you are referring when discussing SDE / NCF multipliers.

As a practical matter, most CPAs and bankers are not business appraisers. Many business appraisers are neither – rather financial analysts skilled in applied economics.

The Multiple of Discretionary Earnings method is one example. The method also allows you to account for a number of financial and operational strengths / weaknesses that business has.

Take a look at our implementation of this well-known business valuation method at:

http://www.valuadder.com/tour/multiple-of-discretionary-earnings.html

Please see this article on how capitalization and discounting valuation methods differ at:

http://www.valuadder.com/valuationguide/business-valuation-capitalization-discounting.html

A comment here:

EBITDA, EBIT, and Net Profit are familiar to accountants and bankers. They are sometimes used when establishing pricing multiples under the market approach to business valuation (i.e. comparable business sales).

For most closely held firms, the cash flow is the typical basis for determining the business value. The reason is that business value is an economic term, not an accounting one.

Experienced investors, such as venture capitalists, focus on the earnings-generating potential of a business enterprise. One of the key income-based methods used in appraising the value of a firm is Discounted Cash Flow.

I would suggest you review professional appraisal sources on the subject matter. A good reference is the text “Valuing Small Businesses and Professional Practices”, by Dr. Shannon Pratt et al, perhaps the most respected business appraiser in the US.

By: ethicalbusinessbuilder

ethicalbusinessbuilder — Wed, 05 Mar 2008 06:16:16 +0000

Interesting. In my business valuation experience with 2 bankers, 1 CPA, at least 5 business owners/buyers, 2 large international franchise departments, and the body that represents a large (400+) independently owned franchise network, they all looked at some form of EBITDA. I’ve talked with other accountants, CVA’s, accounting/economics students etc. and they all seem to want to use some form EBITDA for a business valuation as well.

In other words, I don’t think I’ve encountered anyone in the “professional” accounting community who doesn’t look at EBIDTA (other then maybe Brad Sugars). Apparently I’m not hanging around the same people as you are. lol However I do agree with you that businesses should be valued based on cashflow.

In your experience, when using SDE or Net Cash Flow is that generally multiplied by some number based on the intangible “business strengths”? Or is it just taken as a single year of Net Cash Flow or SDE?