A number of factors are critical to a business valuation. To get the most accurate number, you should include the following:
EBITDA – EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization. This is a measure of your profits. Many businesses rely on it because it doesn’t include expenses, which can skew your understanding of how your company is performing.
SDE – Another financial acronym, SDE stands for Seller’s Discretionary Earnings (SDE), and is a formula used by most businesses under $1 million in adjusted earnings.
SDE is particularly critical for smaller printing businesses as it hones in on the “owner’s benefit," which can significantly influence your bottom line. An investor will be particularly focused on this number.
The EBITDA and the SDE generally are within 5-10% of each other, which is a tolerable difference as you plot strategy.
The Most Important Number of All
Not surprisingly, the most important number to consider as part of your valuation efforts is also the most difficult to find. That’s the capitalization rate used by your specific industry.
It’s not enough to say “printing industry” either, as many online valuation programs tend to offer. That’s simply too large a sector to lump together. As a label and narrow web printer, you know how different your sector is from a commercial printer, for example.
Why is your industry's capitalization rate so important?
It’s crucial because an investor or a lender will use your industry’s capitalization rate to benchmark the value of your company. Ultimately, it determines the fair market value, and depending on the size of a merger and acquisition transaction, the differences could mean millions.
Even if you’re not selling your business, the number is important to you because it can help you steer your long-term strategy. For example, if industry benchmarks indicate your profit margins should be 13 percent and you’re clunking along at 5 percent, that’s a good indicator that you need to refine your internal costs and make appropriate changes.
Whether you’re researching this value for yourself or relying on a professional, make sure the numbers are industry-specific. This is difficult data to find, but considering its long-term implications, it’s well worth it.
Rock LaManna helps printing owners and CEOs use their company financials to prioritize and choose the proper strategic path. He is President and CEO of the LaManna Alliance, and provides guidance on how to grow a printing business, merge with a synergistic partner, make a strategic acquisition, or create a succession plan. Rock can be reached by email at Rock@RockLaManna.com.