Most businesses are valued based on a multiple of their profits, and demonstrating more profit will lead to more money when you sell. One way of doing this that many business owners overlook is normalising your profits. This means taking certain incomes and expenses out of your profit and loss statement to give a more accurate picture of your operating costs. It’s worth taking the time to do this because it can add thousands to the final value of your business.
Normal and not-so-normal expenses, e.g. start-up launch costs to get the business up and running are considered a “one-off” and are not repeated the following year; if there is an abnormal expense like the need to fly first class because you’ve suffered in the past from deep vein thrombosis, doesn’t mean to say that a business trip needs to be First Class for the new owner, hence that difference between First and Economy should be taken out of the expenses (actual valid case study).
To calculate value, a buyer will start with your EBITDA, or earnings before interest, taxes, depreciation or amortisation. Interest, taxes, depreciation and amortisation are taken out of the figure because all owners will handle them differently based on factors like loan arrangements and tax strategy.
From this basic EBITDA, certain expenses are added back to form an adjusted EBITDA. Add-backs are expenses being paid for by the business, which the new owner won’t need to pay. This is important because an offer is generally based on the adjusted EBITDA, and every dollar you can add back to that is worth multiple dollars in your pocket. For example, if your start-up expenses came to $30,000, and your business is valued at EBITDA times three, adding that back equals another $90,000 when you sell.
Worth thinking about... happy to discuss, Cheers Lester.