The most commonly used "earnings figures" used for small to mid-market business valuation are Net income (NI), Earnings Before Interest and Taxes (EBIT), Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) and Seller's Discretionary Cash Flow (SDCF). With a variety of metrics to choose from it is natural for a business owner to ask "which is the right one to use for my business". To answer the question, first we need a quick background on what are these earnings metrics.
Ø NI: NI is net income of the company after deducting all expenses of the company, including all operating costs, owners and officers, salaries, interest, taxes, etc. Some people regard this as the "true earnings", but for many small to medium enterprises market, based on a constant quest to minimize taxes, this figure may be grossly underestimated and is not a true picture of the company's earnings stream.
ØEBIT: EBIT is the net profit of the company before the funding and payroll taxes. The reason for using this metric is that high tax accounting and owner dependent and a pretax profit of EUR look at the profits would be a better indicator of the income stream are. Also, the interest payments are a function of financing the company's strategy and varies depending on preference of the debt-equity ratio of property. The resulting leverage can artificially inflateor the air from the NI. EBIT result shows a figure that is adjusted for these variables to reflect a more accurate picture of the outcome.
Ø EBITDA: The accounting treatment of depreciation for many companies is significantly different from the actual cash flow impact of these elements have on the business. EBITDA allows a consideration of the profitability of the business before factoring in these two positions. One must be aware that this may be a highly misleadingIndicator based on the characteristics of the business write-downs and adjustments to EBITDA are almost always necessary to obtain a true picture of the revenue.
Ø SDCF: For smaller companies, where the owner, the business can be seen as a "job", can the true measure of profitability, the sum of all funds of the owners from the business, including salaries, benefits and other perks.
Actual
Ø EBIT = Net income + interest + Taxes
Ø EBITDA = EBIT + Depreciation + Amortization
Ø SDCF = EBITDA + Owner / Officer 's Salary + Benefits + Perks
So, to answer the question: "What outcome is right for my company?" Depends on the type and size of a business and an understanding of the metric may be closer to the actual result. For many mid-market companies is the appropriate metric is likely to EBIT or EBITDA.
Once the correct metric is identified, the> Entrepreneur has the range of multiples that may mean for the chosen metrics. For example, tend to-earnings ratio for most small businesses vary from 1 to 3 times SDCF and the earnings ratio for mid-sized firms are more likely to be 3 to 5 times EBIT or 3 to 7 times EBITDA.
However, companies tend to be more unique than typical and multiples, which is good for a company may be too low or too high for another. The more unusualThe company is, the more likely it is that the multiplier is the typical outdoor range.
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