Lesson 2 · Learn
Somebody set an expectation about what this business would earn in the future. Nobody told the person responsible for delivering it.
7 minutes · No tool · Teaching only
One definition first, because the rest of the course rests on it.
EBITDA is earnings before interest, taxes, depreciation and amortization. Roughly, it is what the business itself earns before financing decisions and accounting choices are layered on top. When I say earnings from here on, that is what I mean.
Whatever your ownership looks like, there is a level of earnings this business has to reach. It arrives from one of three directions, and the arithmetic is identical in all three.
They paid a price based on what they expected the business to earn later. That expectation is a real number sitting in a spreadsheet you have almost certainly never been shown.
The loan assumed a level of earnings, and the covenants are the visible edge of an assumption you probably did not set.
There is still a number: what this business has to earn to be worth what you want for it when you stop running it. Same arithmetic, and you are the one who set it.
A budget is negotiated once a year. It gets debated, trimmed, agreed, and then quietly forgiven when the year turns out differently. Everybody involved understands that it is a planning document.
This number is not negotiated and not forgiven. It arrives on one day — the day you sell, refinance, or hand the business to whoever comes next — and on that day it is either met or it is not. There is no partial credit and no revised forecast.
That is the whole difference. Your budget is a conversation. This number is an arrival.
Six inputs. Most sit in documents you already have access to, or in the memory of whoever handled the transaction.
What the business earned when the current owners took it on.
What they paid, relative to those earnings.
How much of that purchase was borrowed money rather than their own.
How many years until they expect to be out — or until you intend to stop.
What you think the business will be worth as a multiple of its earnings at the end.
How many years until they expect to be out — or until you intend to stop.
If you have no investors, the same worksheet runs on two figures instead: what you would want for this business, and when. Nothing else changes.
That last input — what the business will be worth as a multiple of its earnings when you are done — is the only one nobody controls. It moves with the market, with interest rates, and with how your sector is viewed in a year you cannot see yet.
So run it twice. Once at the multiple you expect, and once a full turn lower. Then plan against the lower one. If the two answers are close, your plan rests on your own performance. If they are far apart, a meaningful part of it is a bet on market conditions, and you should know that before you commit three years to it.
Lesson 3 walks the six inputs on screen with a worked example, then hands you the calculator. Have the purchase figures nearby if you can find them. If you cannot, estimates get you close enough to be useful.
Next — lesson 3
