EBITDA is a frequently used term in business, and if you’re getting ready to buy or sell an automotive business, you need to know what it means and why it’s important. Though there are a variety of factors you’ll consider when contemplating an acquisition or sale, EBITDA is a commonly used starting point, and the expert automotive business brokers at AutoCenter Sales explain why below.
What is EBITDA?
EBITDA is an acronym for “earnings before interest, taxes, depreciation, and amortization.” The figure that results from this calculation is an attempt to exclude costs that are unrelated to an automotive business’s intrinsic value. Therefore, the figure represents the approximate cash flow of the company; however EBITDA and free cash flow are not interchangeable; they represent different things.
EBITDA gives a general indication of the financial performance of a business because cash flow is the true driver of value in any company. Consequently, the figure is typically referred to as a preliminary indicator of the overall success of an automotive business. Adjusted or normalized EBITDA reflects the expenses or income that will no longer be present when the new owner takes possession of the business.
Though there’s a long-standing debate on whether EBITDA is a suboptimal business valuation metric, it often plays a dominant role when sellers, buyers, and brokers work to determine automotive business values. However, EBITDA does not take into consideration several key factors that also play roles in determining the overall value of a business. So what other factors must you consider when looking at auto shops for sale? Or, what should you look at if you’re planning to put your auto shop on the market?
Beyond EBITDA: What You Need to Look At
Though EBITDA is a helpful tool for assessing an automotive business’s market value, it doesn’t account for factors that could potentially influence the business’s future profitability or growth. As a buyer or seller, some of the other factors you’ll need to consider include:
● Financial statements and tax returns (typically 3-5 years worth)
● Balance sheet history, which can reveal potential cash flow issues
● Intangibles (non-physical assets, such as brand recognition, intellectual property, etc.)
● Potential capital expenditures to drive additional business growth
● Post-closing interest levels, non-cash charges, and income taxes
If you’re looking to buy an automotive business, you’ll likely need to justify the business’s EBITDA to obtain the necessary financing for the acquisition. If, on the other hand, you’re looking to sell your automotive business, EBITDA will play a role in determining the company’s attractiveness to potential investors.
All things considered, buying or selling an automotive business is a major endeavor and one you shouldn’t undertake alone. Need help running the numbers? Not sure whether you’re making the best business decision for your needs? At AutoCenter Sales, we’re here to help! With over 25 years of experience as automotive business brokers, we’ve facilitated thousands of automotive business sales and acquisitions across the United States. If you’ve got questions, we’ve got answers, so don’t hesitate to contact our team and ask!
AutoCenter Sales: Expert Automotive Business Brokers at Your Service
Whether you’re planning to buy or sell an automotive business, our team at AutoCenter Sales is here to ensure you have the smoothest, most lucrative experience possible. To learn more about our process and how we can help you, feel free to give our team a call at 1-800-874-5793.