SHAREHOLDER EQUITY — VALUING YOUR COMPANY

Both the buyer and seller negotiate over the relevancy of such adjustments (e.g., excess owner’s compensation, travel and entertainment expenses deemed personal in nature or below-market rentals).

Although EBITDA is represented as a numerical amount, different companies with similar EBITDAs are not necessarily equivalent in value. Therefore, consider EBITDA as a starting point to be used in a rule of thumb for your marketplace. Using EBITDA at a multiple of four gives the appearance of a lower purchase price. Using the example in Chart 2 for all firms, a purchase investment price of $3,468,000 is only four times EBITDA, but it is actually 21 times pre-tax earnings, which is a horrendous price.