Just about every shop owner has thought about it. I’m talking about what the worth of their business would be in a sale.
Some of the reasons that may get you thinking about it could be retirement, succession planning or maybe some random thing that made you wonder about it.
If you’re like every other auto body shop owner, you’ve had one of those days that got you considering it, like the day when a technician quit, the workers comp bill came in or when an employee didn’t follow your process and angered a customer. We’ve all had those days that make you want to know what your business is worth in case you want to sell.
It’s better to know what your worth may be than not to know. Usually the final number that determines your shop’s worth is a derivative of your EBITDA number, or earnings before interest, taxes, depreciation and amortization. I’ve broken down the process of calculating EBITDA below, just in case you’re thinking of selling some day.
Most buyers will measure your EBITDA. I know I do when I look at an acquisition. EBITDA is a measure of your operating efficiency. An EBITDA analysis will give you a measurement of profits without having to consider financing costs or interest or normal accounting practices such as depreciation and amortization and taxes.
Doing an EBIDTA calculation is somewhat easy; all that’s needed is your income statement and cash flow statement. It has been a practice of mine to understand my EBIDTA every year after our CPA does the year-end statements. You want to be sure that the numbers you’re calculating for EBITDA are certifiable and provided to you by your CPA. I’m not saying that net income isn’t an important measurement of a company’s health, because I believe it is. But if you’re looking to exit the business, know your EBIDTA number. It’s the measurement I use when acquiring a shop. In all acquisitions I’ve made, I’ve paid a multiple of EBIDTA, not net profit.
To figure out EBIDTA, compile your income statement, cash flow statement and your profit and loss report. You’ll need to pull information from all three documents. Earnings, tax and interest figures will be in your income statement, and depreciation and amortization will be in your profit and loss report and/or your cash
Start by getting your EBIT number. It’s calculated by subtracting your expenses from your sales (excluding interest and taxes). As an example, say your sales last year were $2 million and your expenses (besides interest and taxes) were $1.6 million. Your remaining number of $400,000 is your EBIT. For clarification, your operating expenses include almost everything below the gross profit line such as salaries, rent and utilities, cost of goods sold, advertising, administrative expenses, depreciation and amortization.
Next, add up expenses due depreciation. Usually the figure is calculated and is found on your profit and loss report or cash flow statement. The company’s tangible assets such as equipment, buildings and some property improvements are depreciated every year; your CPA knows what amount to depreciate for each item by keeping a schedule every year. You’ll be adding back this amount when calculating the final EBITDA.
Lastly, add up the amortization expenses. They’ll also be found on your profit and loss report or cash flow statement and are usually listed along with depreciation expenses. In short, this is a figure that refers to the expenses incurred from the acquisition of an intangible asset over the asset’s life. You’ll be adding back this amount when calculating the final EBITDA.
The final EBITDA number is now ready to be calculated: EBIT + depreciation + amortization = EBITDA.
I hope this was easy to follow. If you have verified statements done by your CPA, you’ll have the numbers you need to do the calculation. If you’re contemplating a sale or need assistance in calculating your EBITDA with someone in the industry, I would be happy to help.