Acq 4: Introduction

“Profit is not a cause, but a result.”

– Peter F. Drucker, Management Consultant and Author

Here’s the bottom line – before you value your business, you must make sure your financials accurately reflect the actual earning capacity of your business. You do this by making numerous adjustments to your financial statements to calculate your business’s cash flow. This process is called normalizing, recasting, or adjusting your financial statements. The resulting cash flow after the adjustments have been made is called earnings before interest, taxes, depreciation, and amortization (EBITDA).

In this chapter, I talk about the importance of normalizing your financial statements, walk you through how the normalization process works, and share common adjustments that can and can’t be made when calculating EBITDA. Don’t skip this chapter – understanding how EBITDA is calculated is critical to the valuation process because this is the number one measure of cash flow all buyers use to value businesses in the middle market. A thorough understanding of EBITDA is the foundation on which to value any mid-sized business.