Category: Business Planning

EBIT is used to measure a business’s operational profits, or trading profits, and is calculated by adding-back interest paid and deducting interest income from profit before tax. These numbers can be found on the face of a profit and loss, which is included in a business’s financial statements.

EBITDA is earnings before interest, taxes, depreciation and amortisation. To calculate EBITDA in simple terms, start with profit before tax, deduct interest income, and add-back interest expense, depreciation and amortisation. All these amounts are easily found on a business’s financial statements.

EBITDA is earnings before interest, tax, depreciation and amortisation, and is often used to value small businesses. Some argue that EBITDA represents a better picture of profit from trade operations, but by adding back depreciation and amortisation, this distorts the profitability of the business.

The way to value a small business is to use the profit multiplier method. This is calculated using profit, multiplied by a multiple between 1-3-times profits. Use an average of 3 year’s EBIT and add-back seller wages and benefits, one-off income and costs and deduct the cost to replace the owner.

The saying “luck is what happens when preparation meets opportunity”, when used in the context of buying a business, is you’re more likely to find a business to buy if you acquire the knowledge, skills, and insights into buying a business; thereby priming yourself for a successful acquisition.

If you aim to buy a business sooner rather than later, and you’re prepared to take more risk, it’s better to be flexible with your sector choice. But on the flip-side, and if you’re happy to wait longer, and you want a reduced risk, it’s possible to buy a business too, but it may take longer.