If you are selling your business, you must understand this basic metric. <\/p>\n\n\n\n
All too often, business owners focus solely on net earnings multiples quoted by various M&A providers, and ignore the underlying assumptions on business debts, transaction terms, risk factors, synergies and growth rates. The common perception is that if one company is worth x times its earnings, then so is mine.<\/p>\n\n\n\n
The Enterprise Value (EV)\/EBITDA ratio is a popular metric used as a valuation tool to help with comparisons. Most business valuations assume a transfer of a company on a debt free basis. <\/p>\n\n\n\n
The enterprise-value-to-EBITDA ratio is calculated by dividing EV by EBITDA. The lower the EV\/EBITDA, the cheaper the valuation for a company.<\/p>\n\n\n\n
EV = Purchase Price + Any Debt Assumed \u2013 Cash On Hand<\/p>\n\n\n\n
EBITDA = Net Earnings + Interest + Taxes + Depreciation\/Amortization<\/p>\n\n\n\n
Generally speaking, EV\/EBITDA values below 10 are seen as healthy and most useful when comparing relative values<\/a> among companies within the same industry.<\/p>\n\n\n\n There are many pros and cons to using this ratio. As with most figures, whether it is considered a \u201cgood\u201d metric depends on the specific situation.<\/p>\n\n\n\n Pros include:<\/strong><\/p>\n\n\n\n Cons include:<\/strong><\/p>\n\n\n\n