These three terms above are used commonly when looking to value, sell or buy a business. The reason being is the turnover and profitability of the business are fundamentals when raising finance for the acquisition. The reason being is that the turnover will largely determine the amount that can be raised, and the profitability will determine whether the business can afford to borrow that amount. This is a very high level and of course, a lot of other factors will come into the underwriting process.
Having sufficient cash-flow post acquisition once the business acquisition has taken place is commonly overlooked. Being able to make changes and grow the business is generally why you buy a business. Not just merely looking at how historically the business has performed. Keeping cash-flow positive and having the working capital available can allow the business expansion to accelerate.
EBITDA is a term that stands for Earnings Before Interest, Tax Depreciation, and Amortisation. This is a long term for working out the profitability of the business. Depreciation and amortisation can be put into the accounts by the accountant to reduce the tax liability of the business. When adding these back in along with the tax liability it will show the profits of the business. This can’t be solely relied upon but does give an indication of the amount of funding that can be raised. Many finance companies will use EBITDA as a headline figure to work back from on how much funding could be available for a business acquisition to take place.