The Role of EBITDA When Buying or Selling a Franchise Business
When buying a franchise business, there are many factors and numbers to consider. One is EBITDA. EBITDA stands for the earnings before interest, taxes, depreciation and amortization. EBITDA is an indicator of a company’s financial performance, and it can help determine the success of a franchise business. However, EBITDA is only the beginning, and should be looked at alongside many other important numbers and metrics. Keep reading to learn why.
Go Through the Due Diligence Process
Are you seriously considering buying a franchise business? If so, it’ll be important to conduct in-depth due diligence processes on top of EBITDA. This is important in order to assess the company’s long-term financials and get an accurate idea of what the value of the business. Some of the most important things to look for in the due diligence processes are growth, consistency, and quality of earnings. All of these help indicate whether or not a company will continue to see growth.
Normally, a buyer examines three to five years of financial statements and tax returns to find a business’s profitability trends. Buyers also look at the business’s balance sheet history to find existing and potential cash flow issues. By doing this, buyers develop a sense of the business’s predictability.
Look at Considerations Beyond EBITDA
EBITDA is a telling and reliable number to consider. However, when buying a franchise business, it shouldn’t be the only number considered. The reason for this is because it can’t totally capture the worth of a franchise business. While it does capture many important factors, it leaves out intangibles. Intangibles are important because they’re non-physical assets, such as intellectual property or brand recognition. They have the power to impact a business over time and help grow its value. If intangibles are ignored and only EBITDA is taken into consideration, important numbers get missed.
From EBITDA to due diligence processes, we know buying a franchise business is a lot of work. That’s why the brokers at Franchise Sales are here to help simplify the process. Our specialized business brokerage firm will work with you every step of the way to make sure everything is being analyzed and you’re making the best business deal possible. Contact our team to learn more.