The Starting Point

Posted on August 31, 2014 by Danny Windsor

Any successful exit strategy and ultimate successful exit will have a successful beginning.  In fact, this is probably the most important point of the exit strategy process.  The key to a successful start of an exit strategy is an honest assessment of where the company is today in all vital areas.  Only then can a company see the distance from where they are now compared to where they need to be to accomplish their exit goals.

In working with business owners, I have come to realize that virtually all of them have either in writing or in their mind a total dollar value for their business for which they someday hope to realize in the way of a sale.  This is excellent because it means they have planned and have a specific dollar goal for the sale of their business which will meet their needs and those of their loved ones in the future.  The obvious starting point for these owners is to determine the approximate value of their company today in order to establish the distance to their dollar value sales goal in the future.  This is best done by using the EBITDA method.

Every business owner must become very familiar with the EBITDA method of valuation.  What is the EBITDA method of valuation?  It is simply the adjusted earnings of a business before interest, taxes, depreciation, and amortization multiplied by a multiple that is relevant for the company’s particular industry and size. The reason EBITDA is used is stated very clearly by Robert Scarlata, “EBITDA is a framework that allows buyers to compare “apples to apples” instead of “apples to oranges” when viewing businesses with different operating structures (Scarlata, p. 89-90).”  There are two very important words in the above definition, adjusted and multiple.  I will discuss the importance of these two terms in a future article.

For now, understand that your starting goal is to know the current EBITDA of your company and where it needs to be to achieve your exit goals.

*Scarlata, Robert, Manage to Sell Your Business

photo credit: getting started empire avenue via photopin (license)

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