So, you were attending Labelexpo in Chicago last month and during dinner with a group of fellow label company owners, the conversation turned to EBITDA. While you had heard the term many times, you knew you were not fluent enough on the topic to contribute much to the conversation. One guy who seemed to know it all had sold his company for a “ton of money” (per him) to one of the many private equity (PE) firms that have been consolidating the industry. He then mentioned something about the multiple of “adjusted EBITDA” he received as his consideration for the sale and by now you were totally lost!

Let’s see if this edition of the M&A Corner can possibly shed some light on this somewhat complex topic, albeit one that we deal with every day in our boutique Merger & Acquistion practice.

EBITDA stands for Earnings Before Interest, Taxes, Depreciation & Amortization.

This chart illustrates how every public company arrives at the multiple of EBITDA at which it trades. But your company is not public, so how do you get to yours?

For those of you familiar with CDA’s PrintStockWatch, you’ve seen the EBITDA trading multiples of the 15 publicly-traded companies in the printing industry. If not, you can see the most recent chart at: www.printstockwatch.com

EARNINGS (LOSS)

Let’s begin with your Income Statement. Hopefully this has been prepared for your company by your outside CPA annually from your Internal reports as either a Compilation (Good), Review (Better) or Audit (Best). We dedicated an entire M&A Corner to this topic in an earlier L&NW issue – email me at [email protected] if you would like a copy. Different internal financial software programs (such as LabelTraxx, for example) and certainly different CPA firms report Operating Income differently, so we will use after-tax net earnings as our starting point. If you are an S-corp this would not include any Federal Income Taxes but could include some state or other miscellaneous taxes.

The beauty of arriving at an EBITDA number is that it brings all companies back to the same starting point. Again, this is going to get you to a valuation without any regard to debt. Just as with selling your home, we are going to value your business based on a multiple of adjusted EBITDA without regard to debt. Similar to your home mortgage (or HELOC), that amount will be deducted from your Total Consideration to arrive at your net proceeds.

In the above sample, Income Statement, we begin with net (after tax) income. If your company is an S-corp, this will not be relevant to you.

We then “add back” Federal Taxes, Interest and Depreciation/Amortization which may be itemized on your financials. Your CPA has hopefully included depreciation as a component of Cost of Goods Sold (COGS), so you may have to look at the cash flow portion of the CPA report to find that exact amount.

Now you have completed the easy part!

What is next are the “adjustments,”or “add-backs” as they are called.

I always tell our seller clients this: “If I purchased your company on a Friday, what discretionary expenses can I expect to ‘go away’ on Monday.”

Let’s say you are the sole shareholder of your company and drawing $500,000 per year in salary. If you sell the business and do not with the new owner, do you think they will need to spend $500,000 per year to replace you? Probably not (sorry). They will most likely need a general manager who will probably be paid in the range of $150,000 per year. Hence, we can “add back” $350,000 of your salary along with the proportionate taxes, etc. This is called “Excess Owner’s Compensation.”

You have a condo in Florida that you have called a “branch sales office” and written-off substantial country club and HOA dues expenses – these are legitimate “add-backs.” Last year this ran about $17,000. You have had four box seats to your hometown professional baseball team for years – cost ~$50,000 annually. You write-off not only your Mercedes lease, but your wife’s – total ~$28,000.

I think you get the idea!

The sum total of all of these expenses is called “Owner’s Perqs.” Business brokers will call it an “Owner’s Benefit” and probably want to include 100% of your salary, which implies that you do nothing. I usually do not agree with that – business owners don’t do “nothing” or they would sleep better at night.

At the end of the day, when you add up all of these discretionary expenses, you will arrive at an amount called “adjusted EBITDA.” It is a multiple of this number that will lead to your Total Consideration from which you will need to subtract your debt to arrive at your net proceeds.

Typical multiples of “adjusted EBITDA” in the label world right now range from a low of 4X to a high of 8X (and perhaps more). They were higher just a couple of years ago when the buying frenzy created by PE was in full swing.

Positioning your company for sale can be a challenging experience, but the first step is knowing what your “adjusted EBITDA” is and what a knowledgeable person thinks the correct multiple might be for your company. If you are interested in this information, your CPA should be of some help. That said, a firm that deals with sales of companies in your industry might be a better choice. If you are now at a mental impasse, please do not hesitate to reach out to our firm. This is what we have been doing since 1987 while closing over 250 deals for print business owners.


Disclaimer: This “M&A Corner”column was not meant to be a comprehensive tutorial on “adjusting EBITDA” for purposes of a valuation of your business. It was simply meant to get you sufficiently versed on the topic to be able to at least have a dinner conversation with fellow label company owners.


Jim Anderson is the Founder & President of Scottsdale, AZ-based Corporate Development Associates (CDA). CDA is a boutique Merger & Acquisition consulting firm that has focused 100% on the printing industry since 1987. Website: www.printmergers.com. Contact Jim via email: [email protected] or cell/text: 602-432-0426