In the world of mergers and acquisitions, determining the value of a business is a multifaceted process, often relying on the multiples approach. This methodology assesses a target company's worth by comparing it to similar entities within its industry, considering various key metrics specific to the Australian market. These metrics include factors such as:
Once a potential buyer has established an initial valuation for the target business, several crucial factors come into play that can affect this valuation. Here are some common factors that can reduce a business's valuation, even after an offer has been made:
One key element for business sellers in Australia to consider is EBITDA add-backs. These are adjustments made to Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) to reflect the true economic benefits of owning the business. EBITDA add-backs are essential because they help potential buyers understand the business's profitability better.
Here's a simplified example of how to calculate EBITDA add-backs:
| Category | Amount (AUD) |
| Non-recurring expenses | $60,000 |
| Owner's salary | $100,000 |
| Depreciation | $20,000 |
| Interest expense | $10,000 |
| Total EBITDA Add-backs | $190,000 |
In this example, $190,000 is added back to the EBITDA, representing expenses that are not expected to continue under new ownership. This adjustment provides a more accurate picture of the business's true earnings potential, which can positively impact its valuation.
For Australian businesses navigating the complexities of M&A transactions, understanding these factors and the importance of EBITDA add-backs is crucial. It's essential to proactively address these considerations to maximize shareholder value and ensure a successful sale process. While these are seven common factors, the dynamic nature of M&A transactions means that businesses should remain vigilant for any emerging factors that may impact valuation throughout the sale process.
