EBITDA: What Franchise Business Owners Need to Know About Limitations
Did you know? EBITDA calculates the financial health of a business by looking at its earnings before interest, taxes depreciation and amortization. But how do you know when is EBITDA just a number, and what does it mean when comes to the value of your franchise business? Read on to learn about some limitations that are important for business owners to know about.
EBITDA for Buyers
EBITDA has limitations that should be taken in the context of other factors – and anyone who wants to buy your franchise business should conduct other processes to look at your company’s financial performance over a longer period of time. This is crucial for the buyers to get an accurate measure of what your business is worth.
Buyers typically take a look at the financial statements and tax returns of your business for a minimum of three years to determine profitability trends. Other than this, they’ll look at the history of your balance sheet to discover any existing or potential cash flow issues, and they’ll want to make sure your EBITDA is growing steadily over time. So while EBITDA is believed to be an important factor to a buyer, it’s not the only thing they look at to determine the value of your company.
Limits of EBITDA
Oftentimes, business owners weight too much on the multiples of earnings or multiples of EBITDA. While EBITDA is a good measure of a company’s worth when comparing investments, it doesn’t completely capture a company’s worth. Instead, it’s important to remember that things like intellectual property such as patents and trademarks and brand recognition can also receive greater importance in the sale of your business. Building your company’s worth through these intangibles can positively increase your value over time.
Additional Items to Look for
It’s important you consider things like growth rates, size, intangibles, quality of earnings, intellectual property, barriers to entry, and more instead of measuring only EBITA as the sole value for your company. At Franchise Sales, we know that doing this this can be tough, but we have a team of professional franchise business brokers who are here to help you. Get in touch with us to get more information.