Funeral home valuation, Funeral home appraisal, Cemetery Valuation, Cemetery Appraisal

EBITDA became popular in the 70s and 80s when buyers were trying to locate companies that had strong cash flow outside of financing and capital Expenditure concerns. Since buyers were going to change the capital structure anyway, it was convenient to have a quick apples to apples comparison.

EBITDA or Earnings Before Interest, Taxes, Depreciation and Amortization is a more reliable and cleaner comparison than Net Income.
1) In general, it is a much stronger indicator of ongoing, operational strength for the firm.
2) Taxes are considered “non-operational” in a sense because they can be affected by a variety of accounting and tax conventions. These have no bearing on the ongoing, operational strength of the firm.
3) Interest expense is a function of leverage, not operations. Companies in any given industry will have varying degrees of interest expense based on the debt load they incur.
4) Depreciation expense is an accounting convention recognizing investment in physical assets over the life of that asset.  It has no bearing on the ongoing operational strength of the firm. Firms with  investments in large capital expenditures like recently built facilities will have high deprection expense while similar firms with older facilities or fully depreciated physical assets will have lower depreciation expense.
5) Amortization expense is another accounting convention dealing with the amortization of intangibles. Because it is an accounting convention, we want to take it “out” also.    Firms with goodwill acquired through other acquisitions will have amortization expense while similar firms who have built their business without acquisition will have none.

So, EBITDA is considered by the financial community the way to compare apples with apples.  It is computed by adding back to net profits or earnings any income taxes paid by the corporation all interest expense, depreciation and amortization.   This is, of course, where many amateurs foul up.   A good tax planner will encourage a business owner to take advantage of all legitimate business deductions.  This includes inflating personal salaries above market as well as other expenses that might otherwise be personal.  As a result, earnings on many independently owned businesses are reported as less than they might be if they were the subsidiary of a public corporation, for example.  So, before EBITDA can be truly calculated adjustments should be considered by a professionally trained analyst to represent the true picture of operations.  Of course, these adjustments are only legitimate if it is reasonable to expect that an independent buyer will operate in a more efficient fashion or can find economies that the seller has not had access to.  This process is called “normalization or recasting”.

After normalization a funeral home typically yields a an EBITDA ratio of between 20% and 30% of NET Revenue with the average falling in the middle.  Interestingly, a branch (accounted for correctly) will often yield between 40% and 50% because it does not bear the burden of duplicated administrative or ownership overhead.

Next week proper categorization, operating ratios and normalization.

Disclaimer

While I have experience in business valuation, I am not a Certified Business Appraiser.   The explanation and comments contained herein are my own.