Net income, EBIT, EBITDA and SDCF - What is the right metric to use for evaluating business?

The most commonly used "user data" used for the evaluation of small businesses to mid-market is the net income (NI), Earnings Before Interest and Taxes (EBIT), earnings before interest, taxes, depreciation and amortization (EBITDA) and Cash discretion of the seller Flow (SDCF). With a number of parameters to choose a company that is natural to ask "which is the right one to use for my business." To answer this question, we first need a quick background on what these parameters are useful.

Ø NI: NI is the net assets after deducting all expenses of the business including all operating expenses, owners or agents of salary, interest expense, taxes, etc. Some people consider this as "useful", but for real many small mid-market companies, who are constantly looking to reduce taxes, this number may be grossly underestimated and is not a true reflection of the company's earnings stream.

Ø EBIT: EBIT is earnings before net business financing and factoring in taxes. The rationale for using this metric is that tax payments are highly dependent on accounting and owner and a view of profit before tax would be a better indicator of the flow of profit. Similarly, interest payments, which depend on the funding strategy of the company and vary widely depending on the ratio between debt and preferred equity from the property. The resulting leverage factor can artificially inflate or deflate the NI. EBIT shows a number of income that is adjusted for these variables to reflect a truer picture of the gains.

Ø EBITDA: The accounting treatment of depreciation for many companies is substantially different from the actual cash flow impact of these factors have on business. EBITDA allows you to look at the profitability of the business before factoring in these two items. Be aware that this can be a highly misleading indicator on the basis of depreciation and amortization characteristics of the business and the adjustments to EBITDA are almost always necessary to obtain a true picture of the gains.

Ø SDCF: For small businesses where the owner can see the company as a "job", the true measure of profitability may be the sum of all the money comes from business to the owner including salary, benefits and other benefits.

In fact,

Ø EBIT = Net Income + Interest + Taxes

Ø EBITDA = EBIT + Depreciation + Amortization

Ø SDCF = EBITDA + Owner / Officer 's Salary + Benefits + Perks

So the answer to the question "What gain is the right one for my company?" depends on the nature and size of a business and an understanding of the metric, which may more accurately reflect the real gains. For many mid-market companies the appropriate metric is likely to be EBITDA or EBIT.

Once the right metric is identified, the entrepreneur needs to understand the range of multiples that can be applied to the metric chosen. For example, the multiples of earnings for most small businesses tend to vary from 1 to 3 times SDCF and earnings more for half the market, companies are more likely to be 3 to 5 times EBIT or 3 to 7 times EBITDA.

However, companies tend to be more unique than typical, and a multiple that is good for business may be too low or too high for another. The most outstanding business is, the more likely that the multiplier will be outside the typical range .......