When you are preparing to sell your business, you will need a valuation. It is this figure that will determine how much you can reasonably expect to achieve from the transaction, and it should provide a good starting point for negotiations with the buyers.
How do you get an accurate valuation though? Well, the easiest way is to ask a professional M & A consultancy with experience in your business sector to handle it for you. When they do, they will likely use one of the more common companies valuation metrics –the most well-known of which is EBITDA.
What is EBITDA?
EBITDA is an acronym, standing for Earnings Before Interest, Taxes, Depreciation, and Amortization. This is a roundabout way of referring to net profits while taking into account individual asset amortization and depreciation –essentially giving you a figure that is directly related to the profitability of the business.
Why is EBITDA used?
Valuers use EBITDA because it focuses on the actual financial performance of the business (including cash flow) while removing other factors (non-operating expenses, accounting factors, etc). This gives a more standardized view of a business, which can then be used to compare with other businesses using an EBITDA industry multiple.
It is that ability to compare that is so attractive to accountants and financiers using EBITDA –often it is the easiest, and most accurate, way of being able to see how one business stacks up against another in numerical terms.
What is an EBITDA multiple?
This is the amount by which your EBITDA figure is multiplied to come up with an approximate return on investment. The benefit of using this method is that it is inherently comparative –if an individual is reviewing two different pharmacy businesses and wants to focus purely on the numbers, this is the way to level the playing field and compare the two businesses on what they can reasonably expect to get back for their money.
What else is important?
EBITDA is not the only figure you need to consider when selling your business–indeed, relying solely on EBITDA could be detrimental to the buyer. The calculation deliberately excludes key figures that include your capital expenditure (Capex) and your overall liquidity and working capital. Depending on how your business has been run (and your industry) your Capex costs could be a large part of the bigger picture –and whoever buys your company will want to know these details in addition to the EBITDA, so be prepared.
Pinnacle Pharmacy Group
At Pinnacle Pharmacy Group, we have many years of experience in managing mergers and acquisitions across the pharmacy and digital health sectors. We can provide a professional valuation of your business using EBITDA, as well as take care of any other aspects of the transaction.