Allocation Of Fixed Overhead Costs: Significant Impact On Value

Adjusting EBITDA for non-recurring items, determining a maintainable level of EBITDA and selecting an appropriate discount rate are some of the key challengers a business valuator faces when valuing a company. Situations arise where the value of only a division or business unit must be determined as opposed to an entire company. While these challenges are equally applicable to a division, inherent difficulties arise unique to the determination of a division's maintainable level of EBITDA.

Division A may have sales of $10 million on production of 1,000 units while Division B may have sales of $5 million on production of 10,000 units. If we are valuing only one of the divisions, how much of the company's fixed corporate overhead costs belong to each division? Should sales be used as the basis of allocation for all types of fixed overhead or is the number of units produced a better indicator? As EBITDA is a measure of a division's financial performance, it must include