EBITDA (earnings before interest, taxes, depreciation, and amortization) has a tremendous impact on the M&A process because it is a measure of your company’s financial health. It is a commonly accepted, market-defined proxy for cash flow, and cash flow is what buyers are most interested in. So, EBITDA is an easy way to tell your company’s unique story to prospective buyers.
Every company’s story changes over time, according to internal and external factors. As you are preparing to sell, your financial and accounting advisory team can help review the elements that determine EBITDA, making adjustments as needed to ensure the numbers accurately reflect current status and, especially, near-term projections.
For example:
Sellers want EBITDA to be high to support a higher valuation, but your data tells the true story. Reviewing your finances allows you to take a step back and consider how the buyer will interpret your data. Having a quality of earnings performed may help identify weaknesses that a seller can focus on prior to selling.
Data that seems overinflated, unreconciled data, or changing answers to financial questions can make buyers or lenders wonder if other data or statements are off, too. It is best to keep your story basic at first, focusing on key facts, and then expand with greater detail as the process moves forward. If you do not have certain data at your fingertips, do not guess or simply make something up. Wait till accurate information is available.
The same is true for the transaction timeline. Either over- or underpromising can erode credibility.
Accurate, complete information is essential for both sellers and buyers. If you are anticipating a sale down the road, start looking at your finances now. Do you have access to all the detailed data that will be needed? There are many questions to answer during an M&A transaction. If certain information does not exist, why not?
Often, small to midsize companies do not have accounting departments or systems that are as robust as what larger organizations have. For example, if you are a small to midsize company, you may still be using QuickBooks or your team may be using multiple platforms to accomplish their work.
Once your company grows past a certain point, it may become impossible to effectively track your financial data this way. This creates inefficiencies and can hamper decision-making and planning. Upgrading now to an ERP system and integrating accounting processes can provide an appropriate depth of financial data. It will enable your company to continue growing, and when it is time to sell, you will be able to report all needed data.
Do you have a robust monthly close process? Are there reserves to cover inventory loss or product returns? GAAP standards require reserves against loss. Attention to details like these creates more work at month-end, but the inability to provide financials at the level requested down the road can make buyers question how well the business has been run overall.
Choosing the right team of advisors is critical to driving a successful M&A deal. It's imperative that they understand the market and the M&A side of your industry—how businesses are trading, what data buyers expect to see, and so on. Their expertise can help whether you are looking at an exclusive sale or an auction.
And when it comes to EBITDA, an M&A advisory team can bring value to your business and future transaction by gathering analytics that helps tell your go-to-market story. For example, you can engage them for a readiness assessment—less extensive and faster to complete than a full quality of earnings evaluation—which can provide an overview of what you can expect and what will be expected of you during the sales process. Getting started with such activities today will smooth the sales process down the road.
Every situation is different, so the specifics of every readiness engagement differ. Nonetheless, there is a lot to be said for having a trusted professional by your side when you are considering selling your business and throughout the transaction process itself. An experienced financial and accounting partner understands your business and also understands that owners may not be familiar with the M&A process, so they can both educate you and guide you to a successful deal.