Do we have to talk about EBITDAC instead of EBITDA?
What will be the impact of Covid-19 on business valuations? The at first sight ironic pun on the definition of EBITDA might become stubborn facts in the near future while negotiating M&A deals or when we talk about business valuation…
The term EBITDA is common practice in the financial world. Based on my experience, we can say that the term is also frequently used by business owners, without a financial background, but do we really know what it stands for?
EBITDA means Earnings Before Interest, Taxes, Depreciation and Amortization.
The term is used as the standard for the operational cash-flow a business generates over a certain period, without taking into account the financial result, taxes, exceptional income or expenses. As we talk about cash-flow the non-cash costs as depreciations and amortizations are also excluded.
Ebitda is also a crucial component in one of the best known business valuation techniques – the ebitda-multiple method.
In order to get to know the enterprise value the EBITDA of a certain period is multiplied with a certain multiple:
EBITDA * Multiple = Enterprise Value
The correct multiple is calculated based on peer group valuations. The peer multiple can be deducted from the analysis of the valuation of comparable stock quoted companies or other available public information from comparable businesses. For the valuation of SME it might be hard to find comparable companies or information about their valuation. An interesting barometer for the valuation of SME in Belgium is the M&A monitor of Vlerick Business School. Vlerick shows hereunder the evolution in multiples over the last 6 years in Belgium. The multiples are the result of the ratio EV/ EBITDA. Whereby EV stands for Enterprise Value. The graphs below learns for example that for a business with an enterprise value lower then 5 mio € the average market multiple in 2018 amounted 4.8.
Source: Vlerick Business School M&A monitor 2019
In order to get to know the value for the share holder we subtract the net debt position from this enterprise value:
EBITDA * Multiple – Net debt = Equity Value
The net debt position is calculated by making the difference between the financial debts and the cash position of the company.
Question for the near future will be what the impact will be of Covid-19 on business valuations? The at first sight ironic pun on the definition of EBITDA might become stubborn facts in the near future while negotiating M&A deals or when we talk about business valuation, if its not yet the case in current deal negotiation…
Lets hope that we will be able to treat the impact of Covid-19 as an exceptional and non-recurring item in operation cashflow calculations.
Serious food for thought!
In these period of reflection the Aquis corporate finance team is ready to help you with all your questions with regard to business valuation or buying or selling a company.
Managing Partner Aquis Corporate Finance
Ps. For the completeness of this blog we disclose the current definition of EBITDAC: the sum of net income plus interest expense, taxes, depreciation and amortization and consulting fee expenses