SHAREHOLDER EQUITY — VALUING YOUR COMPANY
HAVE YOU heard of the term “Enterprise Value”? Without discussing all of the details and exceptions, enterprise value is a measure of how a buyer determines the value of a printing company in its entirety—and is computed as a multiple of EBITDA. This article discusses the valuation process of a printing company in a logical order as follows:
1. What is EBITDA?
2. Your company is worth enterprise value, and enterprise value is computed as a multiple of EBITDA.
3. How does one maximize enterprise value, which obviously increases the value of your company?
EBITDA is an acronym for earnings before interest, taxes, depreciation and amortization. For example, as illustrated in Chart 1, EBITDA is computed by simply adding back to reported earnings—interest, taxes, depreciation and amortization.
EBITDA does not replace true earnings and too much emphasis on EBITDA can be a mistake. However, it has the most applicability to capital-intensive industries, such as printing.
To give you a feel for EBITDA, Chart 2 presents an illustration of the EBITDA of the PIA/GATF Ratios for all participants and the profit leaders assuming companies with $10,000,000 in sales.
Generally speaking, the value of a printing company can vary from three to five times EBITDA, depending on current market conditions. In the example in Chart 2, the enterprise value for all firms could vary from $2,601,000 to $4,335,000 and the enterprise value for profit leaders could vary from $4,173,000 to $6,955,000. Assuming an interest rate of 7 percent, then all firms would have interest-bearing debt of approximately $2,250,000 and the profit leaders’ interest-bearing debt would be $1,670,000.
Why is EBITDA the factor to be capitalized in arriving at enterprise value? It is sufficient to say that the printing industry is a capital-intense industry and that EBITDA better serves this purpose. As a result, we can readily use EBITDA in determining enterprise value. Aside from this purpose, we have very little use for EBITDA.