Using Adjusted EBITDA to Add Back Value

The sale of a business is challenging on many levels. Arguably, the most difficult aspect of every transaction for buyers and sellers alike is establishing the value of the business that is being sold. Like beauty, value is truly in the eye of the beholder. For an owner who started a business and wants to sell it, determining its value is an emotional process. The seller’s goal is inevitably to maximize the amount of cash the buyer will pay for the business.

A buyer views an acquisition differently; he or she wants to price the transaction favorably so his or her shareholders will maximize their return from the investment. Herein lies the challenge of pricing a business.

There are several approaches for valuing a closely-held business, but the income-power model is the most-preferred method for determining the fair market value of a service business like a collection agency. The underlying theory is that a company’s “value” is denoted by the current income stream that owners accrue. The income stream is typically identified as EBITDA (earnings before interest, taxes, depreciation, and amortization), or the net cash flow of the business. A buyer will then apply a multiple to the selling business’ adjusted EBITDA.

View this content by subscribing

Please register to unlock this content

I already have an account. Log in