There are several business financial attributes required for EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) to work well as a basis for the multiple of earnings method (the method used with the Market Comparable Valuation Approach); see Fair Market Value for a better understanding of the three primary business valuation approaches.
Attributes of marginal value and the associated principles and formulas to achieve; the why’s and how’s of generating extreme value utilizing marginal adjustments and measurements to leverage the business value and ultimately the owner’s wealth.
This article will illustrate the opposite effect using the same business information. A buyer of a business should be leery of financial information and look for improper accounting processes. The goal is to reduce the operational income and ultimately the value of the business. The goal is to get the business valuation to a realistic number.
The scholarly definition and reality are two different perspectives. The student is taught that marginal revenue equals the additional dollars generated for an additional single unit of sales. It is literally taken right down to the micro measurement. This is simple to understand but in small business, the scope of its meaning and impact are substantial to the bottom line.
I often wonder how a business could get better if it didn’t know what being the best meant. How could a small business entrepreneur determine he was indeed performing at or above the industry standard if there was no information available to say what was the best, average or poor? There isn’t any real performance standard, that is financial standards, for any particular small business operation.
In the world of small business, the sale of a business is dependent on two critical elements. They are DISCRETIONARY INCOME and the BUSINESS RISK MULTIPLIER. These two elements are multiplied to create the overall value of the business operation. In general, no small business operation is worth more than three times the discretionary income.