If you didn’t already know, EBITDA calculates a company’s financial health by looking at its earnings before interest, taxes depreciation and amortization. But when is EBITDA just a number, and what does it mean when comes to your automotive business’s market value? Keep reading to learn about some limitations that are important for business owners to understand.
Using EBITDA as a Buyer
Some experts say that EBITDA has limitations that should be taken in the context of other factors – and anyone who wants to buy your automotive business should conduct other processes to look at your business’s financial performance over an extended period of time. This is crucial for the buyers to get a proper understanding of what your business is truly worth.
Looking at financial statements and tax returns of your business for a minimum of three years to determine profitability trends is normal for any buyer. Other than this, buyers will look at your balance sheet history to find any existing or potential cash flow issues. They’ll also want to make sure your EBITDA is consistently growing over time. So while EBITDA is believed to be important, it’s not the only thing a buyer looks at to determine your company’s value.
Limitations of EBITDA
Getting caught up on multiples of earnings or multiples of EBITDA is easy to do. And while EBITDA is an excellent measure of a company’s worth when comparing investments, it doesn’t completely capture a company’s worth. For example, intangibles items like intellectual property such as patents and trademarks and brand recognition can receive more importance in the sale of your business. Building the value of your company through these intangibles can make a big difference on your value over time.
Other Things to Look For
Don’t just measure EBITA as the the sole value for your company. You should also consider things like growth rates, size, intangibles, quality of earnings, intellectual property, barriers to entry, and more. So how do you do that? At Auto Center Sales, we know this can be a daunting task, but we have a team of expert automotive business brokers who are here to help. Get in touch with us to get more information.