Why Use EBITDA Instead of Net Income When Valuing a Business?

When calculating the value of a business most valuations rely on a multiple of EBITDA instead of a multiple of profits. Occasionally, a buyer will object, saying that his return will be after taxes, interest, and depreciation so the profit figure should be used instead of EBITDA. The reason that approach does not work is that the cost of the items that are backed out in EBITDA depend on the sellers circumstances and may be quite different for the buyer.

Let’s look at an example. Assume that we have two businesses (A Widget Inc. and B Widget Maker). Each of the two companies produces the same number of identical widgets, which they sell for the same price, using a machine that cost $2,000,000 and each financed the machine using a bank loan. Because of their credit histories the first company pays 5% on the loan while the second company pays 15%. A Widget Inc. is a sole proprietorship and so shows no corporate taxes on its income statement but B Widget Maker is a C Corp it is paying $100,000 in corporate taxes. Our two widget companies occupy identical buildings, side by side. A Widget Inc. acquired their building a decade ago and this year will be able to take only $100,000 in depreciation. B Widget Maker acquired their building only one year ago and because of the high purchase price will be able to take $400,000 in depreciation on this year’s income statement.

Let’s look at the income statements for these two companies:

……………………………. A Widget Inc……….B Widget Maker

Sales…………………………5,000,000……………..5,000,000
Cost of Goods Sold……..2,000,000……………..2,000,000
Other Expenses*…………1,000,000……………..1,000,000
EBITDA……………………..2,000,000……………..2,000,000
Interest……………………..100,000…………………..300,000
Taxes……………………………….0……………………..100,000
Depreciation…………………100,000…………………400,000
Profits………………………..1,800,000……………..1,200,000

*All other expenses except Interest, Taxes, and Depreciation.

In our simplified universe, based on the excess earnings method of valuation, A would be worth 50% more than B (since 180,00 if 150% of 120,000). But let’s look at what happens to their earnings after you acquire them.

You are going to refinance the machines. Your credit history is better than B’s but you are unwilling to pledge your house as collateral (which A did to get his low rate) so in both cases you could get a rate of 7% (making the interest only payment on the loan $140,000). In both cases you will mark up the value of the building to fair market value, on which you’ll be able to take $450,000 in depreciation. Your company is organized as a C Corporation, and you project taxes on the additional profits at $80,000. Post acquisition, in either case your profits are identical.

So, you ask why not pay on a multiple of what you project your EBITDA would have been? You may internally calculate the rate of return that you’d like to see after non-cash expenses but talking to a seller about your taxes, methods of depreciation, and financing costs is never a good idea. and remember that if you are calculating a multiple based on profits and you want to close deals you’ll need to make the multiple higher since other buyers will be basing theirs on EBITDA.

Finally, I want to add a note about depreciation since with this non-cash expense the problem becomes a little more complex. There is a great deal of latitude in choosing what depreciation method a company uses and often the useful life that is assumed for depreciation is not an accurate reflection of the real world. You certainly do not want to value a company more highly simply because it chose a less aggressive depreciation schedule. In some circumstances, however, depreciation may represent a reasonable approximation of a real expense. I have, for example, seen buyers in the non-emergency medical transportation business who used a seven year depreciation schedule as a proxy for the cost of replacing a fleet of vehicles, which they decided was necessary roughly every seven years. In those cases I have seen buyer and seller agree to talk in terms of EBIT.

Widget Marketing-Can Widgets Benefit B2B Sites

There has been a lot of “buzz” about widgets and widget marketing recently as creative online marketers have discovered the use of widgets. Widgets are simply pieces of embeddable code that can be found on one site, and embedded in another that can be used to promote your own site or blog. Widgets have become popular with users of online communities as a result the business of marketing via widgets is a great way for site owners (including B2B sites) to promote their content and business.

Widget marketing is starting to catch on in the online marketing world. Today there was a great post by Nick Wilson over at Search Engine Land on link baiting for 2007. According to Nick, a major component of link baiting in 2007 will be “widget baiting”. Widget marketing has been discussed in a number of blogs over recent months. In fact, back in November, Top Rank Blog had posted a great interview with Lawrence Coburn on Marketing with Widgets. Coburn is one of the pioneers in widget marketing

How Can Widgets Help B2B Sites?

Simply put, widgets are all about providing your users with the tools to promote your B2B business or any business/online property for that matter. For B2B marketers, widgets offer the potential to be a means of acquiring new customers at a minimal cost, promotion of your site’s presence out to the rest of the Web, and can provide a traffic source to help build your external link inventory.

Widgets are a great way for promoting your site and your content. For B2B sites, which are looking to create streaming media channels (combining audio, video, photos, text, and RSS feeds etc) and broadcast them live across their site’s pages or blog, widgets can help accomplish this. Sites like splashcast specialize in just that.

As I result we have compiled a list of our favorite widgets and widget related sites:

Top 10 Favorite Widget Sites for B2B Search Marketing

My Blog Log

Mashable.com

Widgetoko

Snipperoo

Reuters Widget

Spring Widgets

Word Press Widgets

Poll Daddy

Business Week Widget

My Blog Log is currently my personal favorite as it is very user friendly and is home to a number of interesting and diverse blogs

Honorable Mentions

Sphere.com

I Like.com

Google Gadget Tryouts

Rollyo

Looking for more information on Widgets? Check out the following resources:

http://www.widgetgallery.com

http://www.sexywidget.com

[http://www.cameronolthuis.com/category/widgets]

http://widgets.opera.com

http://blog.snipperoo.com/marketing_widgets/index.html

http://www.widgetslab.com

While widget baiting can be time consuming, the results can be tremendous. Can widgets benefit B2B sites? Most definitely providing that you have a strategy for widget marketing, widgets can help B2B site owners promote their sites, their solutions and their brand.

How do I Use a Website to Promote my Business?

Do you need a website?. Well that depends entirely on how you wish to market your business and whether your competitors have an online presence, it also depends on the type of clients you hope to attract. Let me ask you a straight question – Do you want to increase business for a minimum outlay?.

Most people now have some form of access to the internet, whether at home, at work or through their school or university. For many, searching for a service or product using Google is now much the preferred alternative to opening a phone directory, or scanning the Yellow Pages. With the increase in Broadband technology and the rapid fall in prices then this trend is very likely to continue and grow, with more and more people of all ages having some form of regular internet use. Do you want to miss out on this potential and growth?

Many small business owners and CEOs think nothing of spending hundreds or even thousands of pounds on conventional advertising such as that in Yellow Pages and similar directories, and yet are still missing out on the earning potential of having a website presence. For some this is simply through not having the relevant skills or feeling that they have no webdesign capabilities to even begin to build their own site. However with many webhosts now offering WYSIWYG web creation tools and web builder packages, anybody who is capable of booting a computer now has the possibility of creating a basic website to promote their business.

After word of mouth, my website accounts for nearly all of the new business which my own business gets. Given a price versus revenue comparison, it is the most competitive form of advertising which I have ever used, and the one which yields the most success when it comes to new business leads!.

Remember that the more professional your website looks, the greater chance of impressing potential clients, and of getting an enquiry. For this reason, employing the services of a webdesigner may be a preferred alternative. But for now, let’s talk about how you can build your website with only limited knowledge. Your options are popular software such as Microsoft FrontPage, or other software such as x-site pro. Many internet users have found great success in designing their own websites. Some webhosts now include free website building tools in their hosting packages. Whichever option you decide to choose, when building your website and promoting its existence, there are a few points to consider, and we will discuss those below.

Always avoid free hosting. These are webhosts who allow you to upload your own site for free onto their server. However in return they often add Advertising banners and pop ups onto your website, and these can prove very annoying to internet users, look cheap and tacky and do not portray a professional, business image. You may have a very professional looking website, however if you use free hosting then you do so at your peril and when masses of pop ups great your visitors, then they’ll often close their browsers or surf away without bothering to read any further. Professional webhosting without any form of banners is available for as little as the price of a coffee per month! – far cheaper than any form of newspaper advertising, so don’t skimp when it comes to reliable hosting.

Buy a domain name. This promotes your unique company identity, and it is also a good idea to use your company name, as your domain name. Domains ending in .co.uk are often cheaper than .com and will also boost your search engine rankings in geographical area based searches such as Google UK. This may be useful to businesses only serving clients in their country, or those with overseas offices.

Remember to try and incorporate a relevant keyword describing your business service or product(s) within the domain page name. So for example, if you had a business called Acme Widgets and you had a product called Mighty Widget – then you could name the page name extension as mighty-widget.html so the url to that page would look like [http://www.your-domain-name.com/mighty-widget.html]

We will get to other keyword use later.

The most effective websites are the ones which load fast and offer a clean, smooth appearance free of useless information and which are largely uncluttered. Make sure that your name and description of your business appears on each page, and that if your site has more than one page that they are all linked together using an HTML Menu. Do not be tempted to use flash or other fancy image type menus, because search engines will not be able to index the site easily. If you do decide to use a flash based website then make sure that there is an HTML alternative, complete with HTML menus.

Keep the site simple. Remember that you have to make the site appealing to search engine spiders as well as human visitors in order to get your website onto the search engines. After all, it is pointless having a good, professional looking site, if nobody can find it!. Avoid the use of fancy flash based websites and splash pages, although they may add an initial wow factor to the first impression, they are often difficult for some search engines to spider and index, plus they may take forever to load on a slow connection. Very few visitors will wait 30 seconds or more for pages to load, or install special viewers so avoid going over the top with these types of presentation!

Keywords are the words that people use to enter into search engines in order to find a site. Consider which keywords people will be using to find your website. Don’t just concentrate on the obvious and most popular words which describe your business, since these will be difficult to rank highly for, due to the competition!.

Instead, look for other niche search terms and phrases too. Your website should contain as many keywords as possible on each page. Don’t be tempted to just add loads of raw keywords in meaningless strings onto your page, since search engines are wise to this practice of cheating and will penalise your site, plus it looks messy to your human visitors too!. It is far more effective to incorporate these keywords into text paragraphs and try and vary their frequency, so for example if you were a company suppling widgets in London, you could try the following:-

Widget and Sons, a family company suppling widgets in London, we are retailers of the popular Mighty widget range

And then later in the page…

For the best price on mail order widgets and sole distribution of the mighty widget contact our sales department

By doing this, and varying the phrases whilst keeping them keyword rich, you are effectively giving Google something to work with. Hopefully, by adding as many keyword strings as possible your site will (hopefully) appear for several different search terms such as ‘Widgets’ or ‘Mail order widgets + london’ or ‘Mighty Widget’

A Picture paints a thousand words, so don’t forget to add pictures to your website!. But keep the, fairly small so that the site loads quickly. Often 640 x 480 resolution is ideal, or use thumbnail software to load a gallery of clickable smaller images neatly onto a webpage. Remember if you use images that clients like to see happy smiling staff! and a structured, well organised company, so make sure that you don’t accidentally capture your warehouse man reading the paper, or that rubbish in the corner of the office!.

Unless your business is technical or technology based then avoid long descriptions about specifications of products and what machinery you use!. Comparing equipment is only of interest to others in the same industry as you and rarely of concern or top priority clients just looking to buy and end product or obtain service. Besides they can see just how good and how neat and tidy your business looks from your pictures!.

Always display clearly your contact information, and this should include a telephone number. Avoid Hotmail and other free web email addresses such as MSN or Yahoo because this doesn’t look professional and can also be blocked by your recipients spam filter. If you have registered a domain name for your site you will be able to set up email based on this, and cutomise it to your own requirements, for example:- [email protected] or [email protected] . Offering an enquiry form on your website is also a good idea, since it will prevent your email address being copied from your site to be used for Spam (Unsolicited Emails), and ensure that you have all of the relevant information from the client to be able to quote accurately.

Getting your site onto the search engines is the hardest part of the exercise, and this may take between 3 and 12 months to get a decent rank. The more you promote your site the easier it is, and the more successful the results. Simply submitting your site URL to Google’s Submit a Site page is not the most effective way of listing your site and neither is it the quickest. The most effective way of getting your site visited by Search Engines is to add your link to Existing websites of a similar theme and subject and the many online directories which already have a search engine presence.

Another very effective way of boosting search engine presence and getting your website onto search engines quicker is to swap links with other sites. Why not build a simple links page or invest in a topsites script on your website and use this to return links?. Remember that it is only polite internet etiquette to link back to websites which link to you, so it is often expected that you will have a link already in place on your own website, when you contact another webmaster and ask to add your link to his /her site!.

There are many other features which you can build into your website, such as e-commerce features including shopping carts and credit card processing facilities, if your company offers products by mail order. However adding these usually requires some detailed knowledge of website building and other skills in website code and is therefore outside of the scope of this article.

Hopefully, this website article, has given you some information on getting your business a web presence on a budget!.