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What is EBITDA for Your Business?

Running Businesses January 2, 2017

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Having a reliable measure of your business’s financial health is important to ensure its viability and its resale value. EBITDA (earnings before interest, taxes, depreciation and amortisation) is an accounting technique that offers a standard measure of profitability.

Unlike other net income calculations, which use simple formulas like revenue minus expenses, EBITDA allows analysts to better project a business’s long-term profitability and ability to pay off future financing.

A healthy EBITDA can add value to a business and help the owner achieve a good deal when selling.

Calculating EBITDA

To calculate the EBITDA of your business, you need to know its income, expenses, interest, taxes, depreciation (the loss in value of operational assets like equipment over time) and amortisation (expenses for intangible assets like intellectual property over time).

There are two ways to calculate the EBITDA of your business:

  • Revenue – expenses (excluding tax, interest, depreciation and amortisation), or
  • Net income + interest, taxes, depreciation and amortisation

Problems with Using EBITDA

The only issue with relying on EBITDA as a performance indicator is that it doesn’t take into account changes in working capital. The liquidity of a business (its ability to convert assets into cash to pay debts) fluctuates due to capital expenditure, interest and taxes.

A negative EBITDA can indicate that a business has trouble with profitability, but a positive EBITDA doesn’t necessarily mean the business is financially healthy. This is because interest and taxes are real expenses that the business must account for.

If assets owned by the business are difficult to convert to cash, it can have a low level of liquidity even if it has a high level of profitability. Excluding working capital can result in a distorted valuation.

EBITDA can similarly distort a business’s ability to pay off interest. By adding back losses from depreciation and amortisation, a business’s profit can seem greater than they really are. For these reasons, many people consider EBITDA valuations to be deceptive.

EBITDA Margin

To get an idea of how much operating expenses are cutting into the profits of a business, you can calculate an EBITDA margin. This involves calculating EBITDA and then dividing that number by the business’s total revenue.

EBITDA ÷ Total Revenue = EBITDA Margin

The higher this margin is, the less risky the company is in terms of financial investment. Keep in mind that EBITDA isn’t always the best approach for valuing your business for resale. It leaves out important consideration like history, legal information, market conditions, employees and goodwill.

Getting a Reliable Business Valuation

To get an accurate valuation of your business, you’ll need to provide at least three years of accurate financial information. Valuers may also need to visit the premises to check operations and assets.

Key drivers of business valuation include:

  • Financial performance
  • Growth potential
  • Customer mix and spread
  • Cash flow
  • Dependency on the owner

An experienced business broker can point you in the right direction. Once you get an initial valuation of your business, you can find ways to improve it so you can get the best possible price when it’s sold.

Talk to a Business Broker with Experience and Expertise

If you’re thinking about selling your business, get in touch with LJ Hooker Business Broking. We are Australia’s leading business broker with extensive experience buying and selling quality small businesses and well-known franchises including Dominos, Kwik Kopy, Dairy Farmers and Michel’s Patisserie.

Call 02 9552 1111 or contact us online to find out more.

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Getting the Most Out of Your Accountant

Running Businesses December 8, 2016

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Small business owners in Australia rely heavily on their accountants for the right advice and direction during every stage of their venture, from start-up to selling. Choosing the right accountant can be a difficult but very important decision.

Business owners should look for an accountant they can trust. It should be someone who can manage the financial side of the business while owners handle the day-to-day operations. Finding an experienced accountant you can rely on is invaluable and it contributes to the overall value of a business.

To get the most out of your accountant, be thorough during the hiring process. Below we list some ideal characteristics you should consider when interviewing accountants.

Communication

You should look for an accountant that will communicate with you regularly about both your finances and your business in general. You also want them to talk in plain English rather than using financial jargon all the time.

As a basic test, try having a conversation about basic small business accounting. Ask about starting or running a small business. Go with someone who seems trustworthy and knows what they’re talking about while being friendly and understanding.

Convenience

Will your accountant provide a good service that is convenient for you? Ask about their availability and whether they will take regular phone calls from you and answer emails on a timely basis.

An accountant who is proactive is an even bigger plus. Many business owners don’t have time to sit back and think conceptually about how business operations can be improved. A proactive accountant will monitor this and alert you to things that can help.

Technology

Advancements in accounting technology over the years have changed the way accounting services can be delivered.

It’s this technological change that has allowed accountants to take on a greater advisory role rather than crunching numbers all day. You want an accountant who uses the most recent technology. It should offer full transparency and valuable insights into your business while being free enough to offer advice.

Costs

You want an accountant who is relatively affordable but you don’t want to go for the cheapest option. Try to find an appropriate balance to best benefit your business.

More importantly, you should ask how they structure their fees. Many accountants offer a flat rate fee structure with payment options that won’t come with any end of year shocks. A flexible payment approach eases the burden at tax time for business owners.

Buying or Selling a Business? Talk to an Expert Broker

If you’re thinking about buying or selling a business in Sydney, get in touch with LJ Hooker Business Broking. We are Australia’s leading business broking team with extensive experience buying and selling quality small businesses and franchises.

Call 02 9552 1111 or contact us online to find out more.

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A Survival Guide for Small Business Owners

Running Businesses November 27, 2016

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Small businesses account for the vast majority (97 per cent) of all businesses in Australia. Unfortunately, these businesses face significant and ongoing challenges that constantly threaten their viability. According to the Australian Bureau of Statistics, more than 60 per cent of small businesses close within the first three years.

Recessions, economic downturns, internal conflict and industry shakeouts all contribute to this alarming figure. But a report by The Australian Securities and Investment Commission (ASIC) found that the leading reason (44 per cent) was poor strategic management.

Below we offer some tips to help your small business plan for survival, regardless of the economic environment or the unique challenges it faces.

Have a Plan

Business owners should always have a stringent plan, outlining everything from objectives and financing to sales and marketing. The ASIC report found that 40 per cent of small businesses that failed had inadequate cash flow or high cash use. Running out of money is certainly one of the biggest and most obvious reasons a business could go under.

By having a strategic plan in place, you can gain a detailed understanding of your business’s financial position. That way, you can identify the need to change your behaviour and take action before it is too late.

Cut Costs with Precision

When businesses are in financial trouble, a sweeping cost-reduction policy is a common approach. But for small businesses, cost cutting needs to be done with precision. Too little and your cash flow problems will persist. Too much and your business may not recover.

Strive to keep production/back-end budgets as low as possible and keep prices competitive. Never undermine the quality of your products or services. One approach is to outsource certain administrative functions of your business.

Examples could include payroll operations or IT infrastructure management, both of which involve significant ongoing costs to maintain in-house.

Differentiation and Customisation

During difficult periods where businesses or whole industries are struggling to make sales, reinventing the way you offer your products or services can draw more customers. This could include working with customers to identify and produce tailored solutions for them.

Customising your products or services to fit the ever-changing needs of customers can provide the necessary boost to reignite your business or help it survive during difficult times.

Use Low-Budget Marketing

Marketing tends to be one of the first functions of a business to get cut during difficult times. But with less marketing, the number of incoming prospects is reduced resulting in another, potentially greater, threat to your business’s financial position.

Businesses should never reduce their marketing activities during these times. Instead, replace them with low-budget marketing strategies like social media, online marketing and networking.

Focus on the Fundamentals

Surviving difficult times may mean revisiting the fundamental principles of running a business. Make sure you’re doing regular financial checks, getting advice when you need to, providing proper training, managing your relationships well, and documenting everything.

Keeping your business in good shape is particularly important if your long-term goal is to sell the business for a profit.

Selling Your Business?

If you’re thinking about selling your business, talk to Australia’s leading business brokers at LJ Hooker Business Broking. We have more than 16,000 buyers on our bespoke database and we are experts at managing business sales and acquisitions.

We can offer advice on how to prepare your business for sale, providing high-quality support throughout the process. Call 02 9552 1111 or contact us online to find out more.

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A Good Broker, a Good Accountant & a Good Lawyer

Running Businesses November 11, 2016

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Starting a business can be intimidating. You need money to live on, money to buy equipment and money to pay staff; all while finding customers and complying with the relevant laws. Lawyers and accountants are expensive, which can make it tempting to forgo these services to reduce your costs.

This would be a terrible mistake. You see, running a successful business requires you to leverage the skills of several professionals. Accountants and lawyers are almost always necessary, and depending on the type of business, you may need help elsewhere.

The Importance of an Accountant in Small Business

According to an MYOB survey of SME owners, nearly half the participants said their accountant was the first person they speak to when their business is in financial difficulty.

But accountants play a far bigger role in small business than they once did. Rather than just being called up during tax time or during times of crisis, they offer a constant source of financial insight and advice throughout the year. This helps businesses grow and remain profitable.

Running a business is difficult, especially during the early periods. An accountant can keep track of tax changes and other financial implications for your business. If you’re buying a business, an accountant can offer important advice about its financial health and how to structure it going forward.

The Importance of a Lawyer in Small Business

While many new business owners understand the importance of an accountant, some think a lawyer is unnecessary. This results in avoiding legal help until it’s too late. By too late, we mean they are in legal trouble that could otherwise have been avoided.

Australia’s judicial system can be complex. A business owner rarely has the time to examine and reflect upon every legal consideration. The right lawyer can do that for you. They should have experience in your industry and take the time to educate you about the legal matters of your business.

A lawyer also offers security and protection. You need to protect your intellectual property, including your business’s logo, name and brand through trademark and copyright protection. A lawyer can take care of these issues while you concentrate on other important tasks relating to your business.

Engage an Experienced Business Broker

Most mistakes made by new business owners could have been prevented if they’d gotten the right, expert advice. The consequences of these simple mistakes can be devastating in the business world. Avoid the risk and use professionals for important tasks.

If you’re thinking about buying a business, you should get in touch with an experienced business broker. They can provide valuable information about the businesses they are selling, as well as offering advice, and helping to find a good fit for you.

LJ Hooker Business Broking is Australia’s leading business broker. Based in Sydney, we have extensive experience buying and selling quality small businesses and franchises like Dominos and Michel’s Patisserie.

Call 02 9552 1111 or contact us online to find out more today.

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Ethical Business – People before Profits

Running Businesses October 16, 2016

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Businesses around the world are increasingly operating under a model that uses holistic techniques and strives to be ethical. Called holistic businesses, these organisations consider the impact of every process when developing policies and procedures. This is opposed to focusing on specific components, such as profit.

Ethical business practices involve ensuring the highest legal and moral standards are observed in your relationships with stakeholders. In other words, it involves considering the effect your business operations have on your workforce, your business partners, the community and the environment.

The approach is often described as focusing on ‘people over profits’. But by nurturing long-term relationships based on trust, your business will perform better and be more viable in the long run.

The Role of Ethics in Business

Ethics are the moral standards we rely on to make decisions. They help us define what kind of behaviour our businesses should or should not engage in. People have argued against the idea of applying moral standards to business actions in the past. The argument was that an organisation should only produce what the market needs and do so in an effective way.

But the majority of people today understand that ethical business practices are crucial for an organisation. The community expects a business to operate in an ethical manner that enhances the image of the community as a whole.

Building Trust and a Good Reputation

A reputation for consistent ethical decisions builds trust in your business within the community, with customers and with business associates and suppliers.

The benefits of having high ethical standards include:

  • Higher morale within the organisation
  • Attract new customers
  • Build customer loyalty
  • Increase the value of your business
  • Reduce the risk of negative publicity or backlash
  • Encourage the community to value your business

Remember, the business owner is a role model for employees. If a business owner acts dishonestly or indifferently towards people who are important to the business, the likelihood of conflict and misconduct occurring among employees and suppliers is higher.

Writing a Code of Ethics

Ethical behaviour is simply making good business decisions based on an established code of ethics. Business owners should establish a written code of ethics to serve as a framework for decisions made by them and their employees.

A code of ethics helps to instil a culture of principled and honest behaviour and decision making in the workplace. When developing this code, business owners should consider the following.

  • Identify general principles that would lead to fair business practices
  • Check with industry associations and similar businesses for basic standards to review
  • Consider the expectations and values of the community and other stakeholders
  • Remember that ethical questions don’t always have a well-defined, faultless answer
  • Write specific statements to assist you and others in making day-to-day ethical decisions
  • Apply this code to a written policy and procedure manual
  • Train your employees and discuss the importance of ethical practice to them

Your code of ethics should apply to all business activities. This could range from how you handle employee performance problems to minimising the negative impact of your business operations on the environment.

About LJ Hooker Business Broking

LJ Hooker Business Broking is Australia’s leading business broker. Based in Sydney, we buy and sell businesses from well-known franchises like Pizza Hut as well as independent small businesses.

If you’re interested in buying or selling a business, get in touch with our team today. Call 02 9552 1111 or contact us online.

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