In mergers and acquisitions (M&A), sellers and buyers
normally base their price calculations on "multiples" of
EBITDA, a figure often used by investors to analyze a company's
value. EBITDA is extremely important in M&A transactions, and
especially so for the determination of the purchase price. However,
like all other estimation tools, EBITDA has inherent limitations
and dangers.
The term is not formally defined by general accounting
standards, rather it is an acronym for "Earnings Before
Interest, Taxes, Depreciation and Amortization." While the
theory behind multiples based on EBITDA may be sound, in practice
reliance on these by sellers and buyers alike is often quite
flawed. Additionally, the use of EBITDA in estimating value in
small or family-owned business transactions creates difficulties in
the negotiation process because of the limited availability and
quality of financial statement information.
