EBITDA & Common Add-Backs for Amazon FBA Businesses
What is EBITDA?
EBITDA is an acronym which means earnings before interest, taxes, depreciation and amortization. It is a measure of a company’s overall financial performance and is also used as an alternative to net income when valuing a business.
EBITDA is focused on a company’s operating decisions as it looks at a company’s profitability from its principal operations before capital structure, leverage, and depreciation are taken into account. Additionally, EBITDA can be used as an accurate means of comparing one business to another.
Five Common Add-Backs for Amazon FBA Business Owners
Now that we’re more familiar with EBITDA, let’s discuss some common add-backs that Amazon FBA business owners can use to increase business valuation.
Many business owners, especially successful ones, take excess salaries and compensation compared to what it would cost to hire a replacement. The variance between the owner compensation and the market compensation would provide an adjustment to EBITDA. An acquirer is not likely to pay such a hefty compensation to an owner’s replacement, and thus, the difference between the expected amounts going forward versus what was paid is the add-back.
Benefits and Taxes
Let’s create a scenario where the owner of a business and/or other employees are leaving the business post-acquisition; these individuals’ benefits may be appropriate for add-backs. Additionally, making add-backs for adjustments to an owner’s benefits means that corresponding taxes should also be added back.
Unique or One-Time Business Expenses
A business may have unusual or one-time expenses that are handled separately. Many of these can be reasonably added back because of their unlikeliness to re-occur. Some examples of these instances include bad hires, discontinued operations, fees related to future business transactions (accounting), recruiting expenses, losses suffered in launching a new initiative, plant closing, and peer group costs.
Severance Payments and Lawsuit Settlements
While severance payments and lawsuit settlements are rare, they may be cause for further due diligence on the buyer’s behalf; however, these payments can be an example of a legitimate add-back. This is assuming, of course, that these forms of settlements are unusual for the company. For these to be considered add-back, they should not re-occur in the future.
Personal expenses can consist of a company vehicle and its expenses (insurance, etc.), travel expenses, monthly fees to various clubs, meals, mobile phone accounts, entertainment and family members on the payroll that are non-working in the company. Any expense that does not affect the performance of a business is considered a personal expense.
With these add-backs fresh in your mind, you can use our FBA Valuation Calculator to see where your business or a business that you are analyzing stands.
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