EBITDA and Other Scary Words (Series: MBA Boot Camp)

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Practical and entertaining education for
attorneys, accountants, business owners
and executives, and investors.

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DISCLAIMER
The material in this webinar is for informational purposes only. It should not be considered
legal, financial or other professional advice. You should consult with an attorney or other
appropriate professional to determine what may be best for your individual needs. While
Financial Poise™ takes reasonable steps to ensure the information it publishes is accurate,
Financial Poise™ makes no guaranty in this regard.
About this PowerPoint: if you are looking at this PowerPoint without the benefit of
listening to the conversation that surrounded it then you are doing yourself a disservice.
This PowerPoint was prepared in contemplation of being viewed in conjunction with
listening to a one hour webinar on the topic

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MEET THE FACULTY
Moderator:
Jonathan Friedland – Sugar Felsenthal Grais & Helsinger
Panelists:
Michael Schwarzmann – Independent CRO and Restructuring Advisor
Dave Eisner, CPA – Miller, Cooper & Co., Ltd.
Robert Mundy – Ankura Consulting Group

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ABOUT THIS WEBINAR:
EBITDA and Other Scary Words
This webinar explores the ins and outs of financial language and how you
can navigate the seeming labyrinth of a language that can sound foreign and
in some ways counterintuitive. This webinar teaches the correct use of EBIT,
EBITDA and EBITDAR while also dealing with concepts like Cap Rate vs.
Capital Cost. This webinar also sheds light on issues with ROI and Payback
among other valuation tools and explain what a Cash Conversion Cycle looks
like for your business.

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ABOUT THIS SERIES:
MBA Shortcut
“If you don’t know your numbers, you don’t know your business.” This is a common refrain that
is equally applicable to attorney and other consultants who work with businesses.
This webinar series is designed for you if you are a startup founder, business owner, executive,
investor, attorney or consultant who, though not a finance or accounting professional, finds
herself needing to understand finance and accounting. It won’t make you an expert but it will
give you the tools you need to speak with experts in order to get more out of them and it will
provide a solid foundation on which you can build.
Packed with illustrative examples, helpful anecdotes and real-world case studies, this series
teaches you some of the key take things you need to understand about finance and accounting.

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EPISODES IN THIS SERIES
3/7/19 Episode #1:
4/4/19 Episode #2:
How to Read a Balance Sheet –And Why You Care!
5/9/19 Episode #3:
The KPI- Cash Flow Modeling and Projections
6/6/19 Episode #4:
Where Did All My Profits Go? Mastering the Concept of Working
Capital
Dates shown are premiere dates.
All webinars will be available
On Demand approximately 4 weeks
after they premiere.

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Episode #1:

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FINANCIAL METRICS

Financial / Accounting Ratios

Inputs for Financial / Accounting Ratios

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FINANCIAL / ACCOUNTING RATIO

A relative magnitude of two selected numerical values taken from an
enterprise's financial statements.

Used to compare the strengths and weaknesses between/among companies

By Whom?

By managers within a company

By current and potential shareholders (owners) of a company

By company’s creditors.

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INPUTS FOR FINANCIAL / ACCOUNTING
RATIO
Values used in calculating financial ratios are derived from:

Balance sheet

Income statement

Statement of cash flows

Statement of changes in equity.

Data contained in these statements is based on the accounting method and
accounting standards used

These statements provide certain key metrics

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Balance Sheet Sample
Link (
https://basicaccountinghelp.com/balance-sheet-example.html
)

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Financial Statement Sample
Link(
https://corporatefinanceinstitute.com/resources/knowledge/accounting/gross-profit/
)

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A BRIEF NOTE ON GAAP (GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES)

Collection of commonly accepted accounting rules and standards for financial
reporting.

Includes definitions of concepts and principles, as well as industry-specific
rules.

Designed to ensure that financial reporting is transparent and consistent from
one organization to another.

But not all terms/concepts are defined in GAAP, i.e., EBITDA

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KEY METRICS

What is key, varies by:

Point in lifecycle

Industry

Financial strength

Purpose in considering

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EXAMPLES OF SOME KEY METRICS

Gross Profit Margin

Compares cost of goods or services to income derived from those costs

Tool to determine productivity when compared against others in same industry

Current Ratio

Measures liquidity

Total Current Assets / Total Current Liabilities

Working Capital

Total Current Assets - Total Current Liabilities

Positive working capital means company can pay off its short-term liabilities.
Negative working capital means company currently is unable to meet its short-
term liabilities with its current assets.

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EXAMPLES OF SOME KEY METRICS (cont'd)

Debt/Equity Ratio

Measures the extent of leverage in a company

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)

Essentially, this is the net operating income of a company

Can be used to analyze and compare profitability between companies because it
eliminates effects of financing and accounting decisions.

Essentially, a measure of cash flow from operations, which is available to service
debt and make capital expenditures

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SOME KEY METRICS FROM AN INVESTOR'S
PERSPECTIVE

Liquidity

Earnings Growth and Growth of Net Income

Return on Assets

Operating Cash Flow

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THE INVESTOR'S PERSPECTIVE (cont'd) -
LIQUID (BALANCE SHEET)

Can the company pay everything it needs to pay in the next year?

The current ratio compares current assets (assets that can be turned into cash
in the next year) with current liabilities (obligations that have to be paid in the
next year)

Rule of thumb: 2:1 ratio of liquidity to debt is good

Large, well-run company may have lower ratio cash control is good

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EARNING GROWTH AND GROWTH OF NET
INCOME (INCOME STATEMENT)

Is company growing?

Look across top and bottom lines of income statement. Top line and bottom
line should be growing, in a fairly parallel manner.

To the extent a company creates operating leverage (for example, through
economies of scale), bottom line can grow at a faster pace than top line

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RETURN ON ASSETS

Return on assets, return on equity, and return on capital = measures of
compared to amount of money being used to get those earnings.

Return on assets is an indicator of how profitable a company is relative to its
total assets.

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OPERATING CASH FLOW (STATEMENT OF
CASH FLOWS)

How is the company generating cash?

Operating cash flow - $ used to pay for capital expenses = owner’s cash flow
or free cash.

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SOME KEY METRICS FOR STARTUPS

Customer Acquisition Cost (CAC) & Lifetime Value of Customer (LTV)

Churn Rate (number of clients who drop its services in a given period)

Revenue Run Rate (extrapolation of annualized revenue based on current
income levels)

Cash Flow/Burn Rate (speed with which a business uses up its cash reserves to
pay for overhead)

Fixed vs. Variable Costs

Breakeven Analysis

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SOME KEY METRICS FOR LENDERS
Source: https://corporatefinanceinstitute.com/resources/knowledge/finance/assessing-debt-capacity/

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SOME KEY METRICS FOR ACQUIRERS

Growth: Companies with much higher or much lower growth (measured by
their three-year compound annual growth rate in sales) than the average are
the most likely to become acquisition targets.

Profitability: Private companies with much higher or much lower profitability
(measured by their ratio of EBITDA to sales) than the average are the most
likely to become acquisition targets.
Source:
https://www.forbes.com/sites/mattporzio/2016/10/03/6-key-financial-indicators-of-attractive-acquisition-
targets/#a46b5ce1ab35

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SOME KEY METRICS FOR ACQUIRERS (cont'd)

Leverage: Private companies with much higher leverage (measured by their
ratio of debt to EBITDA) than the average are the most likely to become
acquisition targets. Public companies with much lower leverage than the
average are the most likely to become acquisition targets.

Size: Private companies that are much larger or smaller (measured by total
sales) than the average are the most likely to become acquisition targets. Public
companies that are much smaller than the average are more likely to become
acquisition targets.
Source:

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SOME KEY METRICS FOR ACQUIRERS (cont'd)

Liquidity: Target companies have lower levels of liquidity (measured their ratio
of current assets to current liabilities) than non-target companies.

Valuation: Public companies with lower valuation multiples (measured by their
ratio of enterprise value to EBITDA) than the average are the most likely to
become acquisition targets.
Source:

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EBITDA – DEFINING & DEMYSTIFYING

Earnings Before Interest Taxes Depreciation & Amortization

Used to measure a company's financial strength by approximating cash flows,
without factoring in tax conditions or accounting decisions.

Focuses on measuring financial strength by removing expenses that are not
part of a company's core functions.

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EBITDA – HISTORY & USE

Popularized in the 80s in leveraged buyouts ("LBOs"), when acquirers looked
to assess profitability of distressed businesses, and wanted to determine
whether company acquired could pay down debts quickly after restructuring.

EBITDA can be used by management to compare company performance
against similar companies that may operate in different tax brackets or have
different capital structures.

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EBITDA – BREAKING DOWN EACH
COMPONENT

Earnings

The net calculation concluded by EBITDA–essentially the company's Net
Profit

Often referred to as the "bottom line" - Net Profit is calculated by
subtracting total expenses from total revenues

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COMPONENT (cont'd)

Before Interest

Costs incurred for financing

Considered non-operating expense on company's income statement

Represents interest payable for any type of financing (bonds, loans,
convertible debt, lines of credit, etc.)

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COMPONENT (cont'd)

Before Taxes

Taxes payable vary company to company, based on jurisdictions operating,
structure of organization, etc.

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COMPONENT (cont'd)

Before Depreciation

Captures economic and functional decline in the value of a tangible asset (such as
property, plant, and equipment (“PP&E”)) over the asset's expected life of the
asset.

Multiple methods of depreciation used under US GAAP to

May also be differences in how an asset's decrease in value is calculated for
financial and tax reporting

Considered a non-cash expense because no cash outflow associated with asset's
declining value (cost is purely economic)

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COMPONENT (cont'd)

Before Amortization

Representation of declining value of long-lived intangible asset over its
expected economic life.

May include intangibles such as capitalized software, or acquired
intangible assets such as trade names, customer relationships, and
technology

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ADVANTAGES OF EBITDA

Simplicity

Easy metric for investors or others conducting due diligence to understand
company's ability to make money.

Comparability

EBITDA creates means of comparing multiple companies in an industry
against one another by stripping out variable factors (interest, taxes,
depreciation, amortization).

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DISADVANTAGES OF EBITDA

Inaccuracy

By not factoring in interest, taxes, etc., EBITDA may not create a full
picture of a company's actual ability to operate profitably.

Misuse

EBITDA may be manipulated to make company appear more profitable
than it actually is.

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DISADVANTAGES OF EBITDA (cont'd)
“EBITDA is one of the most deceptive and overused financial terms in business and
investment finance. In a weak attempt to create a level playing field between two
comparable companies in the same industry, EBITDA instead creates confusion by
excluding important metrics like working capital changes. EBITDA cannot be used
alone to create an accurate cash flow picture we need to move from EBITDA to
actual cash flow.”
Source:
The Business Ferret (http://thebusinessferret.com/key-financial-metrics/ebitda-to-cash-flow/)

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EBITDA HYPO

Suppose you wanted to evaluate two lemonade stands. For the purposes of
illustration, we'll assume these two companies use the exact same lemonade
stands and carry the same amount of inventory, cash in the register, etc., thus
their balance sheets carry the same amount of assets

Lemonade Stand A was funded entirely by equity. Lemonade Stand B primarily
uses debt to fund its operations.

The only difference between them is how they choose to finance these assets --
one with debt, one with equity.

Income statements for these two lemonade stands appear in the next slide.

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EBITDA HYPO: LEMONADE STAND A
Revenue

$1,000
Cost of Goods Sold

$300
Interest Expense

$0
Depreciation of Lemonade Stand

$50
Income before taxes

$650
Net Income (35% tax rate)

$422.50
EBITDA

$700

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EBITDA HYPO: LEMONADE STAND B
Revenue $1,000
Cost of Goods Sold

$300
Interest Expense ($1,500 at 10%
interest)

$150
Depreciation of Lemonade Stand

$50
Income before taxes

$500
Net Income (35% tax rate)

$325
EBITDA $700

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EBITDA HYPO (cont'd)

Because Lemonade Stand B uses substantially more debt ($1,500 at 10%
interest) to finance its operations, it is less profitable in terms of net
income ($325 in profits versus $422.50).

However, when compared on the basis of EBITDA, the lemonade stands
are equal, each producing $700 in EBITDA from $1,000 in sales last year.

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VARIATIONS ON A THEME –
EBIT; EBITDAR; EBITDARM

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EBIT

Earnings Before Interest & Taxes

Leaves Depreciation and Amortization as part of calculation

May be preferable to measure actual earnings of companies with high capital
expenditures ("CAPEX" - $$$ used to acquire or maintain fixed assets like
land, buildings, equipment)

44
EBITDAR

Earnings Before Interest Taxes Depreciation Amortization &
Rent/Restructuring costs

Same calculation as EBITDA, but further removes rents and restructuring costs
from equation

Useful for companies contemplating restructuring

45
EBITDARM

Earnings Before Interest Taxes Depreciation Amortization Rent &
Management fees

Modifies EBITDA calculation to remove additional factors of rent and fees
associated with property management

Frequently used when company has rent and management fees representing a
hogher-than-usual percentage of operating costs (Real Estate Investment
Trusts ("REITS"), hospitals, nursing facilities)

Also used by credit ratings agencies

46
ENTERPRISE VALUE (EV)

EV measures a company’s total value, and looks at entire market value rather
than just equity value.

In essence: the effective cost of buying a company, or the theoretical price of a
target company.

47
ENTERPRISE VALUE (EV) (cont'd)
Source: https://corporatefinanceinstitute.com/resources/knowledge/valuation/what-is-enterprise-value-ev/

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ENTERPRISE VALUE (EV) & EBITDA –
CALCULATING ENTERPRISE MULTIPLES

Once EV & EBITDA are known, they can be used in concert to determine an
Enterprise Multiple

Ratio used to determine the value of a company.

Enterprise Multiple looks at a company the way a potential acquirer would,
taking into account the company's debt

49
ENTERPRISE VALUE (EV) & EBITDA –
CALCULATING ENTERPRISE MULTIPLES (cont'd)

Uses:

Investors/buyers can use to determine whether company is
over/undervalued

Compare valuations of multiple companies

Calculating offer price for company by prospective purchaser (example,
offering 4x EBITDA)

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ABOUT THE FACULTY
Jonathan Friedland – jfriedland@sfgh.com
Jonathan Friedland, a senior partner with Sugar Felsenthal Grais & Helsinger, LLP, views his job simply:
to make money for clients whenever possible and to protect their interests at every turn. Licensed in four
states, Jonathan’s transactional work focusses on representing private funds and other owners of private
businesses, and the businesses they own. He regularly advises on M&A activities, structuring new
ventures and restructuring old ones, and on other commercial relationships. Jonathan is rated AV®
Preeminent™ by Martindale-Hubbell, 10/10 by AVVO, and enjoys several other similar distinctions.
Jonathan graduated from the State University of New York at Albany, magna cum laude (in three years)
and from the University of Pennsylvania Law School. He clerked for a federal judge before entering
private practice and served for several years as an Adjunct Professor of Strategic Management at the
University of Chicago’s Graduate School of Business. Jonathan is lead author and editor of several
significant treatises, several chapters in other treatises, and scores of articles on law and business.

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Michael Schwarzmann – michaelschwarzmann@yahoo.com
Michael Schwarzmann has over 20 years’ experience helping identify opportunities to create value for his
clients. I have extensive experience working with established companies when they encounter financial
difficulties by assisting them in developing solutions to address short term cash needs and longer term
profitability. My process includes helping to identify cost savings and value capture scenarios by
analyzing historical financial performance along with current operations and projecting optimizing
strategies. Utilizing weekly and monthly cash flow statements, budgets, and forecasts, I utilize a focused,
data driven approach to identifying opportunities to increase company profitability. Through a broad
review of financial, operational and strategic performance, I help guide companies to increased
profitability. Working across the organization, vertically and horizontally, uncovers additional solutions
and generates greater buy-in of the goals, objectives and action plan, all of which are critical to maximize
the impact of proposed changes. I utilize my legal knowledge to seamlessly work with counsel to identify
and address legal issues in a more cost effective manner. I have guided the development and evaluation of
business plans and formulated successful strategies to preserve or improve asset values. I am a consensus
builder. Industry experience includes: health care, manufacturing, agricultural, construction, restaurants
and franchising, energy and travel.

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Dave Eisner, CPA – deisner@millercooper.com
Dave Eisner is an Audit Principal with Miller, Cooper & Co., Ltd. (MCC) and a member of the firm’s Assurance
and Accounting department. Additionally, Mr. Eisner is a Principal in our Employee Benefit Plan Audit
practice. As an Audit Principal, Mr. Eisner is responsible for the direction and supervision of his engagement
teams and providing insight and support to his clients’ key stakeholders. In addition to serving clients, Dave is
an active member of MCC’s recruiting committee that evaluates experienced hires and campus candidates.
After previously interning at MCC during college, Dave joined Miller Cooper full time in 2003 and has
exclusively served privately-held companies in the middle market his entire career.
Mr. Eisner specializes in audits and accounting projects within the real estate industry, with a focus on
residential and commercial real estate developers and real estate investment fund sponsors. Mr. Eisner’s real
estate experience covers all asset sectors, including single family, multi family, office, industrial, retail, mixed-
use, and land development projects, with reporting under both US GAAP and income tax basis financial
reporting frameworks.
To read more, go to https://www.financialpoise.com/financialpoisewebinars/faculty/dave-m-eisner/

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Robert Mundy – Robert.Mundy@ankura.com
Robert Mundy is a Managing Director at Ankura with extensive experience in business valuation for a variety of
industries, including healthcare, wholesale distribution, retail, manufacturing, and professional services. He is
based in Atlanta. Robert has more than 15 years of business valuation experience focused solely on the
healthcare industry. He has performed valuations for many purposes, including regulatory compliance,
mergers and acquisitions, joint ventures, estate and gift tax, financial reporting, divorce proceedings, and
shareholder transactions.
A frequent speaker and recognized thought leader on healthcare valuation, Robert’s key area of expertise is
transactional healthcare valuation for regulatory compliance purposes. He has significant experience in valuing
hospitals, ambulatory surgery centers, diagnostic imaging centers, radiation therapy centers, and physician
practices. He has authored chapters on healthcare valuation topics in both the “Guide to Healthcare Valuation”
and the “Guide to Healthcare Industry Compensation and Valuation” published by Business Valuation
Resources and the American Health Lawyers Association. Robert’s previous work experience includes serving
as a principal at Pershing Yoakley & Associates P.C. and as senior manager at Gates Moore. He also served as
healthcare valuation manager for Hill Schwartz Spilker Keller LLC.

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IMPORTANT NOTE: The material in this presentation is for general educational purposes only. It has been prepared primarily
for attorneys and accountants for use in the pursuit of their continuing legal education and continuing professional education.

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EBITDA and Other Scary Words (Series: MBA Boot Camp)

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