The last post addressed EBITDA’s “Naughty 11” Problems and What to Do About Them. Today we talk about EBITDA’s “11 goodies” that help counter the “naughty 11” problems and make it a useful tool for analysts, operators, and owners. In the end, there is no single magic measure of cash flow that reveals all about business value. EBITDA, however, is one measure of cash flow that deserves attention in terms of valuation-related analysis, but in the context of solid reviews of historical income statements, balance sheets, and cash flow statements with insights about history and outlook from management.
EBITDA is at the same time the most discussed and most maligned measure of business cash flow. Simply put, EBITDA is Earnings Before Interest, Taxes, Depreciation and Amortization. The problem with EBITDA is that too often analysts or market participants or writers want to think that there is a single measure of cash flow that will reveal all, bringing Utopia to valuation. This post notes 11 things that EBITDA is not or will not do—and compares other cash flow measures according to the same criteria. Utopia does not exist and there is no valuation elixir. Sadly, we actually have to analyze companies to value them or buy them or sell them.
My last post described an early promissory note valuation that provided me with an object lesson in humility. This post is the follow-up to show that it is possible to learn from such lessons and to lay the groundwork for future growth. The ending of this two-part series is happier than its beginning!
While working on the valuation of a series of promissory notes recently, I recalled a case involving my very first note valuation. It reminded me once again that if an appraiser (or any professional) desires an object lesson in humility, he or she just needs to look at a report (or other work product) prepared 30 (or 10, or even five) years ago.
When I was a young business appraiser, or well, when I was a new but not so young business appraiser, the valuation of illiquid minority interests involved developing a base value for a business and then applying two big discounts, a minority interest discount (MID), and then, a marketability discount, aka DLOM. This post is about the first, now disappearing, minority interest discount.
Business owners and their advisers sometimes fixate on the multiples, usually of EBITDA, obtained in transactions. Normally, these are transactions involving other businesses and other owners. However, company owners and managers should focus on building the level, sustainability, and expected growth of their earnings to maximize the value of their businesses.
This week’s post is about a very recent statutory fair value case involving a real estate holding company in New York. The case settled, favorably for the plaintiff/shareholder, after opening arguments at the beginning of trial. The key business valuation question was that of the appropriate marketability discount in a New York fair value determination. All the arguments are shared and analyzed. If you were the holding company, would you have settled?
In May, I’ll be speaking at the AAML/BVR National Divorce Conference in Las Vegas. My topic is “How to Present Complex Finance to Judges.” Given that every divorce trial I’ve seen has been a bench trial, the topic focuses on judges. However, many of the same presentation techniques are certainly applicable to juries, as well.
The idea for this post is simple. I’m asking readers to provide me with examples of the best demonstratives they have seen to present complex financial and valuation issues in court. I’ll also be talking about concepts and ideas, so any thoughts regarding conceptual approaches or philosophical approaches to court testimony would also be helpful.
The relationship between EBITDA and EBIT for any company over time is one measure of the capital intensity of that business. The greater EBITDA is relative to EBIT, the more depreciation and amortization (D&A) that is required to replace existing plant, equipment, and other acquired assets.
Given the transaction and valuation emphasis on EBITDA, it is important for business owners, advisers, and appraisers to develop a better understanding of the relationship between EBITDA and EBIT for individual companies at a point in time and over time, as well as in comparison to other companies.
I recently delivered two presentations at the AICPA 2018 Forensic & Valuation Services Conference. This post provides a brief summary of my comments from the second presentation (Valuation Tax Panel), which provided three perspectives on the impact of the 2017 Tax Cuts and Jobs Act on business valuation.