KCA Capital LLC

EBITDA & Valuation Analysis

Tue, 26 Dec 2023 10:41:40 -0800

EBITDA represents the "cash flow generating" capacity of a business and is often used in a short-hand valuation calculation when tied to an "EBITDA multiple". While very simple in terms of financial analysis, EBITDA based valuation is very heavily weighed in financial circles. As mentioned previously, EBITDA is an important (but imperfect) measure of a company's financial profile as it excludes a number of important issues (non-recurring items, cash debt service / burden, required vs discretionary capital investments, etc.) but "the implied EBITDA multiple" for a growth investment or acquisition is often compared to similar transactions in the same industry and offers a sense of relative valuation that must "make sense" to investors ("expensive" vs "cheap" valuation). It is, in a sense, a proxy for a discounted cash flow analysis in that all businesses are worth the risk-adjusted discounted value of expected future cash flows. A rapidly growing business would typically garner a higher EBITDA multiple vs a slower growing business (more future cash flow relative to today's cash flow would suggest a higher cash flow multiple). A business offering a high percentage of recurring revenue would also deserve a higher multiple (lower risk set of cash flows means lower required discount rate and higher implied EBITDA multiple relative to today's cash flow). Also, smaller businesses often trade at lower EBITDA multiples vs larger version of same business line (smaller businesses have more risk, less access to capital and fly much closer to the hard deck to borrow an expression). What is a sensible EBITDA multiple for your business? Drop me a note - happy discuss in more detail.

Why EBITDA?

Wed, 29 Nov 2023 18:50:55 -0800

Pretty much all discussions with lenders, investors and potential strategic partners will include a healthy chat regarding a company's EBITDA. For those lucky enough to have avoided this topic to date, EBITDA is a holy term in the finance community defined as "Earnings Before Interest, Taxes, Depreciation and Amortization". Fundamentally it is an attempt to capture the "cash flow generating profile" of the entity. It focuses on earnings before Interest because companies can choose to have lots of debt or no debt - best to look at cash flow before interest or capital structure costs. It looks at cash flow before Taxes because some companies pay high taxes and others enjoy tax shields / carryforwards so its best to look at cash flow before all this nonsense. Finally, it is calculated before Depreciation and Amortization because these are non-cash expenses anyways. Keep in mind, EBITDA is only an imperfect proxy for operating cash flow... companies pay cash interest and cash taxes after all, invest in Capital Expenditures (not on the income statement), some operating expenses included in EBITDA are non-recurring and unusual. These factors give rise to other / complementary analyses such as "Adjusted EBITDA", "Free Cash Flow", and a deeper dive into the most holy of financial statements - The Cash Flow Statement. How does EBITDA drive valuation? Drop me a note and let's discuss if I can be helpful.

Private Equity Groups

Wed, 18 Oct 2023 10:03:28 -0700

Private equity groups are important members of the financial community. The typical private equity group is in the business of raising money from institutional investors (sometimes alongside their own money), successfully finding, acquiring and helping established businesses to grow and then selling them after a handful of years to generate a profit. There are variations on pretty much every point I just made but it is directionally correct for the purposes of this summary. In general, the management of the private equity group serves as a "general partner" in an investment and outside investors serve as "limited partners". The PE group charges a "carried interest" and typically participates in the upside return of an investment or portfolio's investment performance beyond certain targets. While they vary widely in their defined "investment criteria", they also vary widely in "personality". I have worked with a number of PE groups over time and they are among the most intelligent, thoughtful and savvy business professionals I have ever met. All business owners should have a direct relationship with at least of handful of relevant / high quality PE groups well before launching any type of formal search process. Need a few good introductions? Drop me a note and let's discuss if I can be helpful.

The Role of Bankers

Wed, 14 Jun 2023 09:13:05 -0700

Investment bankers are wildly misunderstood.. and we do our best to add to the confusion. So, let's summarize what a good investment banker can do for you and your company. First off, a good banker can help you "package" your story - especially through the lense of the financial community - hopefully helping you articulate not just "what you do" but "how your business model is strong and / or unique" and "why this is good time to invest precious capital or time". Next, a good banker will have an established network of relevant contacts in the financial community and can properly introduce you / initiate a meaningful set of discussions. Finally, in the context of a transaction, a good banker provides experienced guidance through the due diligence process, thoughtful and realistic financial analysis to support your business plan and transaction structuring experience to help make sure all the parties can reach the finish line and close. Pro -tip: every business owner should have at least a few investment bankers in their "circle of trust" to make introductions, serve as a "sounding board" and provide general advice over time. Need to get started? Drop me a note and let's see if I can help in any way.