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EBITDA — earnings before interest, taxes, depreciation, and amortization — is a measure of a company's operating performance that is not affected by financing decisions or non-cash expenses.


As the chart below indicates, EBITDA is a relatively new financial metric, having gained popularity over older modes of analyzing financial performance.


EBITDA has become an increasingly popular financial metric. Source: Google Ngram Viewer


EBITDA is often used by financial professionals to compare companies across industries because it provides a more consistent measure of profitability. For example, two companies in different industries may have different levels of debt, which could affect their reported earnings. EBITDA is not affected by debt, so it can be used to compare the profitability of these two companies on a more equal footing.


In addition, EBITDA is not affected by non-cash expenses, such as depreciation and amortization. These expenses are incurred to reflect the wear and tear on a company's assets, but they do not represent a cash outflow. As a result, EBITDA can be used to get a better sense of a company's true profitability.


The applicability of EBITDA across companies with different financial characteristics allows it to be paired with company valuations to produce a multiple. A company's EBITDA multiple is equal to its Enterprise Value divided by its EBITDA. Companies with higher rates of growth, higher quality revenue, and stronger competitive positioning tend to have at higher multiples.


Whereas a construction company may trade at a 3x multiple, a fast-growing technology enabled services company with recurring revenue may trade at above a 10x multiple. The size of the company also matters — larger companies trade at higher multiples than smaller ones because larger companies are generally regarded as safer investments due to their scale and perceived financial stability.


There are a few limitations to using EBITDA. First, it does not take into account a company's capital structure. This means that two companies with the same EBITDA could have very different levels of debt, which could affect their financial strength.


Second, EBITDA does not take into account a company's taxes. This means that two companies with the same EBITDA could have very different levels of tax expense, which could affect their profitability.


As a result, some investors do not think highly of the incorporation of EBITDA into the financial lexicon, including Warren Buffett, who noted in a 2003 annual shareholder meeting that, "Any management that doesn't regard depreciation as an expense is living in a dream world."


Despite these limitations, EBITDA is a useful measure of profitability that is often used by financial professionals to compare companies across industries.



Further Reading:




U.S. Small Business Administration (SBA) offers a number of loan programs to support the financing of small businesses. For those interested in acquiring an existing business, the SBA’s 7(a) loan guaranty program is the agency’s flagship program. It derives its name from Section 7(a) of the Small Business Act of 1953 (P.L. 83-163, as amended), which authorizes the SBA to provide business loans and loan guaranties to American small businesses.


For a sense of scope, in FY2021 the SBA approved 51,856 7(a) loans totaling $36.5 billion. The average approved 7(a) loan amount was $704,581. Loans can be up to $5 million and require as little as 10% down by the buyer.


In the past, the SBA did not allow sellers to roll over equity into the acquired business. This meant that sellers of small businesses were unable to "roll equity" as part of the sale of their business if an SBA 7(a) loan was involved, meaning that they were unable to maintain an equity stake in their business and have the opportunity for a "second bite at the apple" in the case that their business is subsequently sold at a higher price than they sold it for.

The U.S. Small Business Administration (SBA) has announced an update to its 7(a) loan program that will allow sellers to roll over equity into the acquired business by allowing "partial changes in ownership" that were once forbidden. This change is designed to make it easier for buyers to acquire businesses, especially those that are owner-operated.


The seller equity rollover update to the SBA 7(a) loan program is a great opportunity for buyers and sellers. Buyers can now acquire businesses with less cash or financing, and sellers can exit their businesses while still retaining an ownership stake.

Additional Information:

By Keshav Narendra-Babu


Working capital is the operational liquidity of a business or the capital need in order to run the business, usually defined as current assets minus current liabilities. It is essential to maintaining business operations.


Buyers of a business want to make sure that there is enough working capital left in the company in order for a smooth transition and efficient operations post-acquisition. In order to ensure this, buyers analyze the amount of working capital used in the company’s past months and calculate a working capital peg. A working capital peg is a specific target for the working capital needed in a company at the closing of an acquisition.


In order for a sale to be made, both buyers and sellers have to agree on a specific peg amount, and after the acquisition is confirmed, an outside assessor analyzes the

final balance sheets in order to determine the amount of working capital that was kept in the business. If the seller kept more working capital than the peg target, the excess amount is paid by the buyer to the seller. If the seller kept less working capital than the peg target, the deficit is paid by the seller to the buyer.


Negotaitions around working capital can present some of the most contentious parts of a business sale. Disputes often arises in the last few stages of an acquisition, when final terms are being negotiated. It’s important for business owners to understand the implications of working capital throughout their selling process in order to better position themselves

to receive a fair price for their companies.


Given the interests of all parties regarding working capital, it is important to strive for accuracy in calculating the working capital peg. There are several factors to consider, including the seasonality of a business, as the timing of an acquisition plays a significant role in working capital discussions. A seller should be looking over past balance sheets in order to compute average working capital and prepare early for working capital pegs that will be captured in the LOI. In this way, the seller is better positioned to preserve as much value as possible while also servicing the buyer’s needs and concerns in a fair manner.


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