Around the Web: A Week in Summary
A recent article posted on Divestopedia.com entitled “Challenging How We Think of EBITDA” presents the pros and cons of using EBITDA (earnings before interest, tax, depreciation, and amortization) as a method of business valuation. There is a lot of stiff criticism of using this as a valuation method from a lot of prominent figures in the finance world, who doubt its ability to tell the whole picture.
EBITDA is useful in several different ways, from comparing financials across different tax zones and international systems to giving an acquiring company better insight into how a company might behave financially post-merger. But the critics often cite differences in company structure as reasons against using EBITDA as a measure of value: some companies in certain industries are inherently more reliant on the very measures that EBITDA excludes from calculations.
A recent article posted on the PeerComps.com blog entitled “2017 Business Valuation Trends and Forecast” gives a quick overview on two industries that look to have promising outlooks for the rest of 2017: companies in the manufacturing industry and companies in the service industry. As outlined in the article, manufacturing companies with EBITDA above $2.5MM sell for more than those below $2.5MM. Manufacturing companies earning over $10MM per year are also valued, on average, 13 percent higher than they were over the past five years.
Service industry businesses are also booming, according to PeerComps. Valuation is up 28 percent for companies with EBITDA above $1MM and 15 percent for companies with EBITDA above $4.9MM.
A recent article posted on Inc.com entitled “How Recurring Revenue Increases Business Value” details the value that recurring revenue can provide to not only a small business’ bottom line, but also to their valuation. Recurring revenue is important to a potential buyer simply because it provides immediate, guaranteed income that the new owner can count on to come in without sustained effort to make sales. It also reduces risk and is a stable, predictable source of income that is essentially self-sustaining, which means that the new owner can focus on other selling and growth activities.
With several different possible methods to generate recurring revenue, a small business has plenty of opportunities to generate guaranteed, predicable streams of revenue that can both help the company grow as well as increase the business valuation.