Business Brokers and Investment bankers conduct a comprehensive review of historical numbers to show a company in the best financial position possible when it’s up for sale. Learn the most common adjustments to EBITDA, so you can look for them yourself. Numbers are black and white right? Not really. When you hire an investment banker to sell your business, they “normalize” the company’s numbers to present the best version of financial performance. What do they look for, and what can you do in advance to help the sales process? In this article, we identify the top 10 EBITDA adjustments, so you can have a better chance at selling your company at the highest price. EBITDA is usually taken as a proxy for operating cash flow. While EBITDA can be interpreted in different ways, it is often used to value companies by applying a multiple (such as 5x TTM EBITDA). Therefore, because EBITDA can drive the valuation of a company, normalizing it to present the best financial representation just makes sense. Consider a business valuation EARLY in your process; it answers the question “What is my business worth?”
Here are 10 of the best normalizing adjustments:
1. Non-Arms-Length Revenue or Expenses This refers to a company that enters into transactions with related parties at a price that is lower or higher than market rates. When your operating company goes up for sale, you would normalize EBITDA to reect the fair market value of these supplies.
2. Revenue or Expenses Generated by Redundant Assets Redundant assets are not used to run the business. Therefore, if the expenses related to these assets have been paid for by the company, these expenses would be added back to normalize EBITDA.
3. Owner Salaries and Bonuses Owner salaries are often higher or lower than the regular salary that would be paid to a third-party manager. Bonus and any extraordinary owner salaries need to be added back to calculate recurring EBITDA.
4. Rent of Facilities at Prices Above or Below Fair Market Value Many companies do not own the facilities they occupy, but instead rent them from a holding company owned by a shareholder. The rent is often arbitrarily set above the going market rent. EBITDA would be adjusted upwards by adding back the arbitrary, non-arms-length rent and subtracting the true market rent.
5. Start-Up Costs If a new business line has been launched during the period when the historical results are being analyzed, the associated start-up costs should be added back to EBITDA. This is because the costs are sunk and will not be incurred going forward.
6. Lawsuits, Arbitrations, Insurance Claim Recoveries and One-Time Disputes Any extraordinary income or expenses that may have been settled during the review period would not recur. Therefore, they would be deducted or added back.
7. One Time Professional Fees Look out for expenses incurred that relate to matters that do not recur in the future.
8. Repairs and Maintenance One of the most overlooked categories to review is repairs and maintenance. Often, private business owners will aggressively categorize capital expenses as repairs in order to minimize taxes. An adequate review to separate and add any of these capital items back to EBITDA is a must.
9. Inventories If your company provides services using equipment, there is usually parts inventory on hand. Like capital purchases, parts acquired during the year are also expensed to minimize income for tax purposes. If there is more inventory than the general allowance being carried, it would be smart to count and value this inventory as close to the time the business is sold as possible.
10. Other Income and Expenses This financial statement category is usually loaded with items that may be added back to EBITDA. It is also sometimes the dumping ground for expenses that cannot be coded elsewhere. Pay careful attention to these accounts, and make sure that anything that is not recurring gets added back.
source: www.divestopedia.com
Questions? Contact Jeff Adam at (817) 467-2161 for a discreet and confidential discussion about your business, valuation and exit planning.
Adam Noble Group, LLC
During 3 decades of M&A service, Jeff Adam has successfully completed the sale of over 825 businesses and advised or completed 1,000’s of business valuations and exit plans. An entrepreneur in his own right, Jeff has started and grown 12 companies in fields including international finance, B2B services, business valuation, construction, screen printing, Mergers & Acquisitions, engineering, and manufacturing. Jeff has donated his time as a distinguished speaker at numerous national & international conferences since 1977 covering topics such as environmental services, engineering, media, craft breweries, exit planning, business valuation, charitable giving, management, business brokerage and M&A fields.
Jeff is President of Adam Noble Group, LLC, a national M&A Advisory firm, professionally valuing and confidentially selling profitable businesses owned by exit-motivated business owners to qualified strategic, corporate, private equity, partners, management, and first-time buyers. Jeff establishes rapport, builds trust, and educates business owners in the steps to meet their goals as they prepare and achieve the discreet, confidential exit of their business. Jeff exclusively represents sellers of $1M-50M value enterprises and endeavors to transfer their businesses to qualified, capable acquirers who will build upon the seller’s vision, goals, culture, and history. Jeff maintains lifelong repeat and referral relationships with sellers, their acquirers, and service providers.
Adam Noble Group has multiple M&A and business broker specialties: Manufacturing, Defense Industry, Oilfield services, Construction trades, Craft Breweries, Partnership Buyouts, Manufacturing, Service, and Wholesale Distributors.
Our M&A advisors and business brokers are all multi-industry entrepreneurs who have successfully exited their own companies. Jeff has walked in your shoes! Jeff wants to put the BIGGEST CHECK of your life in your pocket! Please contact Jeff, and he will confidentially answer all your questions.
Our GUARANTEE: a 15-minute call could REALLY change your future!