Buying or selling an automotive business is an important decision. Business owners need a full picture to best understand a company’s valuation. One term that comes up often when discussing business sales and acquisitions is EBITDA. Put in the simplest terms, EBITDA is an income statement metric. It is one of several ways to look at a business’s operational performance.
At AutoCenter Sales, we can help you understand the important role EBITDA plays in helping you buy or sell your automotive business.
What Does EBITDA Mean and How Does It Benefit You?
To understand the importance of EBITDA, we must first break down what it stands for. EBITDA is an acronym that stands for:
Just as it says, EBITDA looks at a company’s net income before interest, tax, depreciation, and amortization. It is a shortcut to determining the cash flow an owner receives from a business during a given time period. EBITDA is useful as an income statement metric for comparing companies to other companies within the industry and examining in terms of industry averages.
How EBITDA is Calculated
To determine EBITDA, first subtract the cost of sales from a company’s revenue to determine its gross profit. Next, subtract the company’s SGA (sales, general, and administrative) expenses. Finally, subtract R&D, or research and development expenses if there are any.
When comparing industry metrics, EBITDA offers two major advantages:
1. It allows an organization to draw straightforward industry comparisons while eliminating extraneous factors.
2. It helps to determine the cash flow an owner receives from a business.
A Simple Formula When Buying or Selling an Automotive Center
Organizations often use multipliers of EBITDA to determine the value of a company and arrive at a simplified, ballpark income estimate. The information excluded from EBITDA is generally information that can vary. The simplified way of looking at income metrics excludes this variable information based on the assumption that it may not be necessary to determine profitability.
Here are the reasons for excluding these figures:
EBITDA omits interest because it depends on a specific financing structure. Interest relates to the rate an organization borrowed at and how much the organization borrowed. The rationale behind excluding interest is that interest does not depend on an organization’s operational performance.
EBITDA excludes taxes because they can vary, due to a variety of factors,
including the company’s income, geographic location, current legislation, and political climate.
3. Depreciation and Amortization
The types of assets a company invests in and how long the company uses them are driving factors behind depreciation and amortization. The value of an asset on a balance sheet will change over time as it depreciates in value. However, this change is strictly for accounting purposes and has no impact to the amount of cash the owner receives from the business.
Get the Full Picture When Buying or Selling Your Auto Shop
EBITDA can be useful as a tool for estimating profitability, but it excludes a number of important factors that can be useful in determining an automotive company’s market value. EBITDA fails to account for any personal expenditures the owner may run through the business. Also, EBITDA fails to evaluate the cash needed for capital expenditures. Both of these can significantly impact a company’s profitability.
When buying an automotive business, investors should view EBITDA as one piece of a much larger puzzle.
Automotive Business Sales Experts
Navigating all the variables behind an automotive company’s value can be a challenging undertaking. Our expert automotive business brokers at AutoCenter Sales can help you sort through the information available to get a complete picture of your investment in the
Let our experts walk you through the business process and help you buy or sell your automotive business. Whether you are selling a Jiffy Lube or buying an auto shop, contact us at 1-800-874-5793, or you can message us at firstname.lastname@example.org.