Blog Post

EBITDA: What is it and why does it matter?

nat rosasco • Jan 13, 2018

The use of EBITDA is one of the most widely used metrics to understand the financial performance of a company. The acronym stands for Earnings Before Interest Taxes Depreciation and Amortization. EBITDA allows the financial world to adjust for certain transactions and arrive at a uniform measure of how well a business enterprise is doing. Anyone considering the sale of their business should be keeping an eye on EBITDA, understand exactly how its calculated and the impact it will have on the value of their company.


How is it calculated?

EBITDA is widely accepted to mean cash flow from operations. While EBITDA ignores working capital requirements and capital investment, which we will cover in another post, it provides a quick and widely used measure of just how well a firm is doing. The EBITDA calculation is effective for a buyer as a measure of true cash flow from a business as it ignores certain accounting adjustments, tax payments, and the effect of a Company’s debt burden.


The calculation is as follows:

Net Profit


Plus

Interest

Taxes

Depreciation

Amortization

EBITDA


Remember, EBITDA is a measure of cash flow, and it is generally measured on a debt free basis. Thus, interest is removed from the calculation to measure the cash flow from the business before payment of long term debt. Taxes are also removed as different industries and firms have varying tax environments and may be calculated differently by different owners. EBITDA adjusts for these variations. Non-cash accounting adjustments such as Depreciation and Amortization are eliminated as they are used to spread over time the life of certain assets and as such is susceptible to inconsistent judgment between firms. By removing these items and “normalizing” cash flow, EBITDA improves the ability to compare firms to one another.


What is it used for?

EBITDA is a general measure of cash from operations and is important in assessing the performance of the firm over time compared to industry benchmarks. As such it is a key valuation measure for developing the sale price or valuation of a business. Understanding the change in EBITDA over a period of time facilitates an understanding of the underlying value and cash flow of any business, which is obviously imperative in evaluating potential acquisitions. As a commonly used indicator for research firms, EBITDA benchmarks are often published for specific industries that allow an outsider to discern on average how a firm is performing relative to its peers. As indicated above, however, EBITDA is most widely used as a primary tool in measuring a company’s value, which is typically expressed as a “multiple of EBITDA.” A company with EBITDA of $250,000 and a valuation of $1,000,000, is said to be selling at 4 times EBITDA. Practically, this means the company is worth 4 times its cash flow from operations. Determining the multiple is a topic for another post, but needless to say both the calculation of EBITDA and the determination of the multiple are heavily negotiated business terms that should be understood by all parties to a transaction.

By Jordan Uditsky 04 Jan, 2022
An amendment to the Mechanics Lien Act (the "Act') permits the bonding over of mechanic's liens in the State of Illinois. The bill was signed into law ( 770 ILCS 60/38.1 ) on July 28, 2015, and went into effect on January 1, 2016. This statute is significant because it allows parties to "clear title" to real property that would otherwise be subject to a mechanic's lien. An eligible applicant will be permitted to substitute a bond for the real property subject to the underlying mechanic's lien so that the lien attaches to the bond instead of the real property. Who is Eligible? To take advantage of 770 ILCS 60/38.1 , the party desiring to bond over the lien must be an eligible applicant. The statute defines applicant relatively broadly to include the following parties: An owner; Other lien claimant; A party that has an interest in the property subject to the lien claim; An association representing owners organized under any statute or to which the Common Interest Community Association Act applies; or Any person who may be liable for the payment of the lien claim, including an owner, former owner, association representing owners organized under any statute or to which the Common Interest Community Association Act applies, or the contractor or subcontractor. Process for Filing a Petition To effectively substitute the bond for the real property, the applicant must file a petition with the clerk of the circuit court in the county where the property subject to the underlying lien claim is located. The petition must include the following: The name and address of the applicant and the applicant's attorney, if any; The name and address of the lien claimant; If there is a pending action to enforce the claim, the name of the attorney of record, or if there is no pending claim, but the claim has been recorded, the name of the preparer of the lien claim; The name and address of the owner of record of any real estate subject to the claim or the name and address of the homeowners association or the condominium association; A legal description of the property; A copy of the lien claim; A copy of the proposed eligible surety bond; A certified copy of the surety's certificate of authority from the Department of Insurance or the state agency charged with the duty to issue the certificate; and An undertaking by the applicant to replace the bond with another eligible surety bond in the event that the proposed eligible surety bond ceases to be an eligible bond. After filing a proper petition, the applicant must provide notice and a copy of the petition, either by personal service or certified mail, to every party whose name and address is stated in the petition and the lien party's attorney of record. Jordan Uditsky, an accomplished businessman and seasoned attorney, combines his experience as a legal counselor and successful entrepreneur to advise business owners in the Chicago area.
By Lou Chronowski 10 Nov, 2021
“Pandemic Impact? - New York Federal Court Allows Termination Dispute to Proceed” 
By Lou Chronowski 19 Oct, 2021
Welcome to GHU’s newest blog – On the Move: The Future is Now! This blog focuses on legal and policy issues facing the vehicle industry. The future is now for the vehicle industry. Some states (CA and MA) have issued mandates requiring that vehicle manufacturers stop selling new ICE (internal combustion engine) vehicles by 2035. Most legacy vehicle manufacturers have made various announcements stating that their respective product portfolios will move from ICE to zero emission vehicles (EVs) over the next 10-14 years. Another significant issue facing the issue relates to how vehicles are purchased. Over the past several years, Tesla has charted a distribution model that rejects traditional dealerships and uses direct sales and service. Other EV manufacturers like Rivian and Lucid appear to be headed in a similar direction. It is well known that Apple and Amazon have plans to enter the vehicle space as well. Consumers will have a large role in determining how they want to purchase vehicles and vehicle services (much the same as they did with respect to on-demand transportation with the likes of Uber and Lyft). The question is whether traditional manufacturers will be kept on an uneven playing field with these newer market entrants. Finally, autonomous vehicles (AVs) are right around the corner as well. In addition to consumer adoption and acceptance of EVs, it is still unknown how consumers will react to AVs and whether AVs have a large role in America. The future is now. The changes in the industry are happening now and happening at fast pace. This blog will continue to explore issues facing the vehicle industry. For 20 years, Lou Chronowski has represented motor vehicle manufacturers helping them navigate complex laws and regulations and litigating disputes against dealers. If you have any questions, please contact Lou at lchronowski@ghulaw.com .
Show More
Share by: