{"id":22393,"date":"2022-06-26T07:00:17","date_gmt":"2022-06-26T12:00:17","guid":{"rendered":"https:\/\/www.cfosimplified.com\/?p=22393"},"modified":"2022-09-12T17:40:12","modified_gmt":"2022-09-12T22:40:12","slug":"understand-your-ebitda","status":"publish","type":"post","link":"https:\/\/www.cfosimplified.com\/business\/understand-your-ebitda\/","title":{"rendered":"Thinking of Selling? First, Understand Your EBITDA"},"content":{"rendered":"<p><span style=\"font-weight: 400;\">If you&#8217;re looking at selling your business, one of the things that&#8217;s important for you to understand is how you calculate the value of your business.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Here, we have <\/span><a href=\"https:\/\/www.cfosimplified.com\/about-us\/larry-chester\/\"><span style=\"font-weight: 400;\">Larry Chester<\/span><\/a><span style=\"font-weight: 400;\">, President of CFO Simplified, on camera to discuss why you should first understand your EBITDA prior to selling your business.<\/span><\/p>\n<style>.embed-container { position: relative; padding-bottom: 56.25%; height: 0; overflow: hidden; max-width: 100%; } .embed-container iframe, .embed-container object, .embed-container embed { position: absolute; top: 0; left: 0; width: 100%; height: 100%; }<\/style>\n<div class=\"embed-container\"><iframe src=\"https:\/\/www.youtube.com\/embed\/\/YJ0dJ4X4Z9k\" frameborder=\"0\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/div>\n<h2><span style=\"font-weight: 400;\">What is EBITDA?<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">In most cases, businesses are sold for a multiple of EBITDA, which stands for \u201cearnings before interest, taxes, depreciation, and amortization.\u201d<\/span><\/p>\n<h2><span style=\"font-weight: 400;\">Why is EBITDA Used?<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">The reason this number is used is that it&#8217;s a quick calculation of free cash flow; in other words, cash that&#8217;s being generated by the business.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The exception is that interest and taxes are obviously cash expenses of the business, but because they change based on the owner&#8217;s individual tax situation, EBITDA creates a very standard way of calculating it.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">In short, <\/span><a href=\"https:\/\/www.investopedia.com\/terms\/e\/ebitda.asp\"><span style=\"font-weight: 400;\">EBITDA<\/span><\/a><span style=\"font-weight: 400;\"> can help \u201cmeasure a company\u2019s overall financial performance,\u201d and in some cases, is used as an alternative to net income.<\/span><\/p>\n<h2><span style=\"font-weight: 400;\">What Does EBITDA Mean to a Business Owner?<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">First, a lot of times we&#8217;re looking at multiples that may range from three times EBITDA to as much as 10 or 12 times EBITDA. This depends on how valuable the business is to the strategic or the financial buyer who is making the purchase.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">So, what does that mean for you as a business owner?<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Well, if you\u2019re spending time carefully growing your business, you want to be careful to drive as much profitability as you can through the business.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Now, this is contrary to the way most people run their businesses because they want to reduce their tax obligations. However,\u00a0 the reality is that since the business is being sold for a multiple of EBITDA, a business owner wants to generate the most profit that they possibly can.<\/span><\/p>\n<h3><span style=\"font-weight: 400;\">How Can You Generate the Highest Level of Profitability?<\/span><\/h3>\n<p><span style=\"font-weight: 400;\">So, how do you generate the most profit that you possibly can?<\/span><\/p>\n<p><span style=\"font-weight: 400;\">One of the ways a business owner can support profitability is by paying personal expenses rather than running them through the business.<\/span><\/p>\n<h4><span style=\"font-weight: 400;\">An Example of Profitability<\/span><\/h4>\n<p><span style=\"font-weight: 400;\">Here\u2019s an example.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Let&#8217;s say that on an annual basis as a business owner, you generate $100,000 of additional expenses that you&#8217;re putting through your business.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Perhaps you have a car, insurance expenses, travel expenses, or other things that as a business owner you arrange to put through the business to reduce its profitability.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Now, that&#8217;s $100,000 that you don&#8217;t have to pay taxes on, but the other side is that if you sell your business for an eight times multiple, that means that by pushing that other $100,000 of expenses through the business, you&#8217;re reducing the selling price of your business by $800,000.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Now, I doubt that you&#8217;re spending an additional $800,000 in taxes for that extra $100,000 that you&#8217;re earning \u2026 So, what do we recommend?<\/span><\/p>\n<h2><span style=\"font-weight: 400;\">The Bottom Line<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">The reality is that by managing the expenses you put through your business\u2014and by being careful about how you do that\u2014you can generate more EBITDA and therefore, generate a higher multiple and a higher sales price for your business when you decide to sell it.<\/span><\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-22396 size-large\" src=\"https:\/\/www.cfosimplified.com\/wp-content\/uploads\/2022\/05\/Thinking-of-Selling-First-Understand-Your-EBITDA-2-451x1024.png\" alt=\"infographic of &quot;Thinking of Selling First, Understand Your EBITDA&quot;\" width=\"451\" height=\"1024\" srcset=\"https:\/\/www.cfosimplified.com\/wp-content\/uploads\/2022\/05\/Thinking-of-Selling-First-Understand-Your-EBITDA-2-451x1024.png 451w, https:\/\/www.cfosimplified.com\/wp-content\/uploads\/2022\/05\/Thinking-of-Selling-First-Understand-Your-EBITDA-2-132x300.png 132w, https:\/\/www.cfosimplified.com\/wp-content\/uploads\/2022\/05\/Thinking-of-Selling-First-Understand-Your-EBITDA-2-768x1745.png 768w, https:\/\/www.cfosimplified.com\/wp-content\/uploads\/2022\/05\/Thinking-of-Selling-First-Understand-Your-EBITDA-2-676x1536.png 676w, https:\/\/www.cfosimplified.com\/wp-content\/uploads\/2022\/05\/Thinking-of-Selling-First-Understand-Your-EBITDA-2.png 880w\" sizes=\"(max-width: 451px) 100vw, 451px\" \/><\/p>\n<p><span style=\"font-weight: 400;\">Interested in learning more? Read on for information on <\/span><a href=\"https:\/\/www.cfosimplified.com\/cfo\/how-a-cfo-can-help-sell-your-business\/\"><span style=\"font-weight: 400;\">how a CFO can help sell your business<\/span><\/a><span style=\"font-weight: 400;\">.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>If you&#8217;re looking at selling your business, one of the things that&#8217;s important for you to understand is how you calculate the value of your business. Here, we have Larry Chester, President of CFO Simplified, on camera to discuss why you should first understand your EBITDA prior to selling your business. What is EBITDA? In [&hellip;]<\/p>\n","protected":false},"author":2,"featured_media":22395,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"footnotes":""},"categories":[1774,36,1730,1533,57,1423],"tags":[1928,1838,1743,2051,2049,2048,1913,1833,1924,1872,1768,2050,2053],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v22.5 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Thinking of Selling? First, Understand Your EBITDA - CFO Simplified<\/title>\n<meta name=\"description\" content=\"As a business owner, to sell your business, you must understand EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.cfosimplified.com\/business\/understand-your-ebitda\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Thinking of Selling? First, Understand Your EBITDA - CFO Simplified\" \/>\n<meta property=\"og:description\" content=\"As a business owner, to sell your business, you must understand EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.cfosimplified.com\/business\/understand-your-ebitda\/\" \/>\n<meta property=\"og:site_name\" content=\"CFO Simplified\" \/>\n<meta property=\"article:published_time\" content=\"2022-06-26T12:00:17+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2022-09-12T22:40:12+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/www.cfosimplified.com\/wp-content\/uploads\/2022\/05\/Thinking-of-Selling-First-Understand-Your-EBITDA-1.png\" \/>\n\t<meta property=\"og:image:width\" content=\"1200\" \/>\n\t<meta property=\"og:image:height\" content=\"628\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/png\" \/>\n<meta name=\"author\" content=\"Larry Chester\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"Larry Chester\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"3 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"WebPage\",\"@id\":\"https:\/\/www.cfosimplified.com\/business\/understand-your-ebitda\/\",\"url\":\"https:\/\/www.cfosimplified.com\/business\/understand-your-ebitda\/\",\"name\":\"Thinking of Selling? First, Understand Your EBITDA - CFO Simplified\",\"isPartOf\":{\"@id\":\"https:\/\/www.cfosimplified.com\/#website\"},\"primaryImageOfPage\":{\"@id\":\"https:\/\/www.cfosimplified.com\/business\/understand-your-ebitda\/#primaryimage\"},\"image\":{\"@id\":\"https:\/\/www.cfosimplified.com\/business\/understand-your-ebitda\/#primaryimage\"},\"thumbnailUrl\":\"https:\/\/www.cfosimplified.com\/wp-content\/uploads\/2022\/05\/Thinking-of-Selling-First-Understand-Your-EBITDA-1.png\",\"datePublished\":\"2022-06-26T12:00:17+00:00\",\"dateModified\":\"2022-09-12T22:40:12+00:00\",\"author\":{\"@id\":\"https:\/\/www.cfosimplified.com\/#\/schema\/person\/6081e81b8a669e394aa43c08ae0bc511\"},\"description\":\"As a business owner, to sell your business, you must understand EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).\",\"breadcrumb\":{\"@id\":\"https:\/\/www.cfosimplified.com\/business\/understand-your-ebitda\/#breadcrumb\"},\"inLanguage\":\"en-US\",\"potentialAction\":[{\"@type\":\"ReadAction\",\"target\":[\"https:\/\/www.cfosimplified.com\/business\/understand-your-ebitda\/\"]}]},{\"@type\":\"ImageObject\",\"inLanguage\":\"en-US\",\"@id\":\"https:\/\/www.cfosimplified.com\/business\/understand-your-ebitda\/#primaryimage\",\"url\":\"https:\/\/www.cfosimplified.com\/wp-content\/uploads\/2022\/05\/Thinking-of-Selling-First-Understand-Your-EBITDA-1.png\",\"contentUrl\":\"https:\/\/www.cfosimplified.com\/wp-content\/uploads\/2022\/05\/Thinking-of-Selling-First-Understand-Your-EBITDA-1.png\",\"width\":1200,\"height\":628,\"caption\":\"EBITDA building blocks with calculator sitting behind blocks\"},{\"@type\":\"BreadcrumbList\",\"@id\":\"https:\/\/www.cfosimplified.com\/business\/understand-your-ebitda\/#breadcrumb\",\"itemListElement\":[{\"@type\":\"ListItem\",\"position\":1,\"name\":\"Home\",\"item\":\"https:\/\/www.cfosimplified.com\/\"},{\"@type\":\"ListItem\",\"position\":2,\"name\":\"Thinking of Selling? First, Understand Your EBITDA\"}]},{\"@type\":\"WebSite\",\"@id\":\"https:\/\/www.cfosimplified.com\/#website\",\"url\":\"https:\/\/www.cfosimplified.com\/\",\"name\":\"CFO Simplified\",\"description\":\"Part Time CFOs Full Time Results\",\"potentialAction\":[{\"@type\":\"SearchAction\",\"target\":{\"@type\":\"EntryPoint\",\"urlTemplate\":\"https:\/\/www.cfosimplified.com\/?s={search_term_string}\"},\"query-input\":\"required name=search_term_string\"}],\"inLanguage\":\"en-US\"},{\"@type\":\"Person\",\"@id\":\"https:\/\/www.cfosimplified.com\/#\/schema\/person\/6081e81b8a669e394aa43c08ae0bc511\",\"name\":\"Larry Chester\",\"image\":{\"@type\":\"ImageObject\",\"inLanguage\":\"en-US\",\"@id\":\"https:\/\/www.cfosimplified.com\/#\/schema\/person\/image\/\",\"url\":\"https:\/\/secure.gravatar.com\/avatar\/cfbd9f1fefc7d44d81a5a3e0c4ba9620?s=96&d=mm&r=g\",\"contentUrl\":\"https:\/\/secure.gravatar.com\/avatar\/cfbd9f1fefc7d44d81a5a3e0c4ba9620?s=96&d=mm&r=g\",\"caption\":\"Larry Chester\"},\"description\":\"Larry Chester served as a corporate CFO for 25 years before starting CFO Simplified in 2007. Having worked in manufacturing and service companies of all sizes, he now leads a team of part time CFOs serving small to mid-sized companies throughout the Midwest. They serve the needs of business owners, providing them with Cash Flow Forecasting, Profitability Improvement and Financial Statement Clarity. Since the company\u2019s inception, they have implemented changes that have improved operations, cash flow and profitability to their many clients.\",\"url\":\"https:\/\/www.cfosimplified.com\/author\/adminlarry\/\"}]}<\/script>\n<!-- \/ Yoast SEO plugin. -->","yoast_head_json":{"title":"Thinking of Selling? First, Understand Your EBITDA - CFO Simplified","description":"As a business owner, to sell your business, you must understand EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).","robots":{"index":"index","follow":"follow","max-snippet":"max-snippet:-1","max-image-preview":"max-image-preview:large","max-video-preview":"max-video-preview:-1"},"canonical":"https:\/\/www.cfosimplified.com\/business\/understand-your-ebitda\/","og_locale":"en_US","og_type":"article","og_title":"Thinking of Selling? First, Understand Your EBITDA - CFO Simplified","og_description":"As a business owner, to sell your business, you must understand EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).","og_url":"https:\/\/www.cfosimplified.com\/business\/understand-your-ebitda\/","og_site_name":"CFO Simplified","article_published_time":"2022-06-26T12:00:17+00:00","article_modified_time":"2022-09-12T22:40:12+00:00","og_image":[{"width":1200,"height":628,"url":"https:\/\/www.cfosimplified.com\/wp-content\/uploads\/2022\/05\/Thinking-of-Selling-First-Understand-Your-EBITDA-1.png","type":"image\/png"}],"author":"Larry Chester","twitter_card":"summary_large_image","twitter_misc":{"Written by":"Larry Chester","Est. reading time":"3 minutes"},"schema":{"@context":"https:\/\/schema.org","@graph":[{"@type":"WebPage","@id":"https:\/\/www.cfosimplified.com\/business\/understand-your-ebitda\/","url":"https:\/\/www.cfosimplified.com\/business\/understand-your-ebitda\/","name":"Thinking of Selling? First, Understand Your EBITDA - CFO Simplified","isPartOf":{"@id":"https:\/\/www.cfosimplified.com\/#website"},"primaryImageOfPage":{"@id":"https:\/\/www.cfosimplified.com\/business\/understand-your-ebitda\/#primaryimage"},"image":{"@id":"https:\/\/www.cfosimplified.com\/business\/understand-your-ebitda\/#primaryimage"},"thumbnailUrl":"https:\/\/www.cfosimplified.com\/wp-content\/uploads\/2022\/05\/Thinking-of-Selling-First-Understand-Your-EBITDA-1.png","datePublished":"2022-06-26T12:00:17+00:00","dateModified":"2022-09-12T22:40:12+00:00","author":{"@id":"https:\/\/www.cfosimplified.com\/#\/schema\/person\/6081e81b8a669e394aa43c08ae0bc511"},"description":"As a business owner, to sell your business, you must understand EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).","breadcrumb":{"@id":"https:\/\/www.cfosimplified.com\/business\/understand-your-ebitda\/#breadcrumb"},"inLanguage":"en-US","potentialAction":[{"@type":"ReadAction","target":["https:\/\/www.cfosimplified.com\/business\/understand-your-ebitda\/"]}]},{"@type":"ImageObject","inLanguage":"en-US","@id":"https:\/\/www.cfosimplified.com\/business\/understand-your-ebitda\/#primaryimage","url":"https:\/\/www.cfosimplified.com\/wp-content\/uploads\/2022\/05\/Thinking-of-Selling-First-Understand-Your-EBITDA-1.png","contentUrl":"https:\/\/www.cfosimplified.com\/wp-content\/uploads\/2022\/05\/Thinking-of-Selling-First-Understand-Your-EBITDA-1.png","width":1200,"height":628,"caption":"EBITDA building blocks with calculator sitting behind blocks"},{"@type":"BreadcrumbList","@id":"https:\/\/www.cfosimplified.com\/business\/understand-your-ebitda\/#breadcrumb","itemListElement":[{"@type":"ListItem","position":1,"name":"Home","item":"https:\/\/www.cfosimplified.com\/"},{"@type":"ListItem","position":2,"name":"Thinking of Selling? First, Understand Your EBITDA"}]},{"@type":"WebSite","@id":"https:\/\/www.cfosimplified.com\/#website","url":"https:\/\/www.cfosimplified.com\/","name":"CFO Simplified","description":"Part Time CFOs Full Time Results","potentialAction":[{"@type":"SearchAction","target":{"@type":"EntryPoint","urlTemplate":"https:\/\/www.cfosimplified.com\/?s={search_term_string}"},"query-input":"required name=search_term_string"}],"inLanguage":"en-US"},{"@type":"Person","@id":"https:\/\/www.cfosimplified.com\/#\/schema\/person\/6081e81b8a669e394aa43c08ae0bc511","name":"Larry Chester","image":{"@type":"ImageObject","inLanguage":"en-US","@id":"https:\/\/www.cfosimplified.com\/#\/schema\/person\/image\/","url":"https:\/\/secure.gravatar.com\/avatar\/cfbd9f1fefc7d44d81a5a3e0c4ba9620?s=96&d=mm&r=g","contentUrl":"https:\/\/secure.gravatar.com\/avatar\/cfbd9f1fefc7d44d81a5a3e0c4ba9620?s=96&d=mm&r=g","caption":"Larry Chester"},"description":"Larry Chester served as a corporate CFO for 25 years before starting CFO Simplified in 2007. Having worked in manufacturing and service companies of all sizes, he now leads a team of part time CFOs serving small to mid-sized companies throughout the Midwest. They serve the needs of business owners, providing them with Cash Flow Forecasting, Profitability Improvement and Financial Statement Clarity. Since the company\u2019s inception, they have implemented changes that have improved operations, cash flow and profitability to their many clients.","url":"https:\/\/www.cfosimplified.com\/author\/adminlarry\/"}]}},"_links":{"self":[{"href":"https:\/\/www.cfosimplified.com\/wp-json\/wp\/v2\/posts\/22393"}],"collection":[{"href":"https:\/\/www.cfosimplified.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.cfosimplified.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.cfosimplified.com\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.cfosimplified.com\/wp-json\/wp\/v2\/comments?post=22393"}],"version-history":[{"count":5,"href":"https:\/\/www.cfosimplified.com\/wp-json\/wp\/v2\/posts\/22393\/revisions"}],"predecessor-version":[{"id":22531,"href":"https:\/\/www.cfosimplified.com\/wp-json\/wp\/v2\/posts\/22393\/revisions\/22531"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.cfosimplified.com\/wp-json\/wp\/v2\/media\/22395"}],"wp:attachment":[{"href":"https:\/\/www.cfosimplified.com\/wp-json\/wp\/v2\/media?parent=22393"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.cfosimplified.com\/wp-json\/wp\/v2\/categories?post=22393"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.cfosimplified.com\/wp-json\/wp\/v2\/tags?post=22393"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}