The first step in properly valuing a business is to calculate EBITDA.
This is the Earnings Before Interest Tax Depreciation and Amortization. These items must therefore be added from the financial statements. It is indeed the ability to generate funds for the company. EBITDA “according to the financial statements” is therefore the first figure with which we work.
Then you have to make the adjustments. We will list a few, but there are as many as there are companies…
One of the most common adjustments is shareholder compensation. We must expect normal compensation for the role. We must therefore adjust the salary, extraordinary expenses, income splitting.
The rent expense can be lacking or insufficient when the building and the operating company or shareholder are the same. The real estate portion and the business portion must be seen from two different angles.
Other adjustments to be validated would be at the level of inventories (obsolete or lack), capital expenditures (are they necessary to maintain operations or increase capacity).
As you can see, each case will be specific, and you must ask the right questions.
Once we have adjusted the EBITDA, we must choose which one we will take… The seller usually wants the one for the last year – especially if the growth has been superb! The buyer, however, will want a 5-year average in this case… There are many techniques: linear, weighted averages, medians, isolated cases and even some will take the future…
Already with accounting figures, several people can come up with several answers.