Q. I have been under the impression that telemessaging services are always sold by using a multiple of monthly revenue. A buyer from outside the industry has recently approached me to purchase my business, but they want to offer me a multiple of EBITDA for my business. What does this mean, and how do I figure out the EBITDA for my business?
A. Actually, EBITDA is a much better way to value a business. EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization, and it reflects your profit margin prior to any to any booked expenses. A potential buyer will use this to determine a multiple, which they would use to calculate a return on their investment (ROI). Let’s say you are billing $30k per month with a 25% EBITDA profit margin. That would mean that you are netting $7,500 per month, or $90,000 per year, prior to any interest, taxes, depreciation, and amortization.
The industry as a whole has used the “so many times monthly” formula for a long time. In the past, some smart individual came up with the formula of X times monthly billing, and this formula has stuck. However, when you compare two businesses that are both billing $30k per month, with one showing a profit margin of 20% and the other 30%, should they both sell for the same price?
A telemessaging service with minimal profit and technology can sell for around 2.5 to 2.8 times annual net, whereas a highly profitable operation with the latest in technology, management in place, and located in a major market could sell for as high as four times annual net. If the hypothetical $30k per month business mentioned above is averaging a 25% EBITDA, then it would most likely sell for between 3 to 3.5 times yearly net. For the sake of this particular example, let’s assume that it is 3.2 yearly net, which means the selling price would be $90,000 x 3.2, or $288,000 (which equals 9.6 times monthly billing).
The EBITDA method of calculating the selling price of a business reflects a more accurate timetable in which you would receive a return on your investment. That is, all things being equal, if a buyer pays 3.2 times yearly net, it would take the buyer 3.2 years to get his purchase price returned to him in the form of profit from the business.