What is EBITDA? – Buyers regularly use the term EBITDA (earnings before interest, taxes, depreciation and amortization) as a standard term to assess a company’s profitability and an indication of a company’s underlying free cash flow. EBITDA can give a relatively clear reflection of a company’s true operating performance by ignoring expenses that cloud the picture. It makes it easier to compares different companies on an “apples-to-apples” basis. EBITDA gives prospective buyers a better sense of how much money the post-transaction company can generate before it has to hand over payments to lender (interest) and the government (taxes).
What is My Business Worth? – Buyers derive value based upon a multiple of EBITDA. They do so because the anticipated free cash flow will allow them to service their debt and achieve their required rate of return on the capital they invest.
Financing Options? – Financing options vary significantly depending upon the size of the transaction.
Under $5 million: These deals can usually be funded through local banks using an SBA guarantee to collateralize the loan. Broadly speaking, a buyer can usually finance a purchase using the following breakdown: 30% buyer’s equity, 60% bank financing, 10% seller note
Over $5 million and Under $15 million: These deals are difficult to finance via traditional banks (SBA is not an option) and they are too small for the big cash flow lenders. If these deals involve a strategic buyer, there a good chance the deal will involve a lot of cash and/or stock in the acquiring company. If it’s a non-strategic buyer, the buyer will use a combination of their own equity, bank financing (only to the extent there are assets to collateralize the loan) and the remainder through a seller note, an earn-out clause and/or the seller retaining some ownership.
Over $15 million: These deals are large enough to attract the big cash flow lenders (Citibank, etc.). These lenders will consider a deal based on the merit and quality of the management team. Assets are always a plus, but these banks will lend based on cash flow forecasts regardless of the collateralizable assets involved.
The “Advisor Void” – Successful companies typically have multiple professional people who have helped them achieve their success over the years. These professionals include accountants, attorneys and financial advisors. The issues with accountants and attorneys are they often are not proactive with communications related to business planning and owners are reluctant to engage them for planning advice because they charge additional fees at an hourly rate. Owners typically cannot lead or facilitate a transition plan on their own. A good solution is to build a “board of advisors” led by an advisor who is credentialed, proactive and focuses on planning. An advisor with the Certified Exit Planning Advisor (CEPA) credential could be an ideal team leader. A CEPA advisor is trained to lead in transition planning. The process of planning for a future transition should begin 5-10 years in advance of the targeted transition date. Procrastination can lead to lower valuations or worse. Begin to plan now!
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
FPA Owner Transitions 