What is EBITDA?

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Published: 27 May 2021


EBITDA is an anacronym that has come into common use over the last twenty years and stands for:

Earnings Before Interest, Tax, Depreciation and Amortisation

EBITDA is intended to give a cash flow figure for the company, particularly companies in the SME market.

For the SME market, share transfers usually comprise a takeover or the purchase of the whole of the issued share capital of a company.

In these circumstances, the valuation of a company includes its issued share capital as well as its long-term debt, known collectively as “Enterprise Value”, on the basis that if the whole of the issued share capital is acquired, the purchaser is effectively responsible for repayment of the long-term debt as well.

So, the equivalent to “Price/Earnings” ratio for a quoted company is “Enterprise Value/EBITDA“ ratio for an unquoted company, although the usage of these terms is interchangeable for either type of company.

How SMEs can benefit from EBITDA

In some cases, where SME companies are taken over, there is cash surplus to operating requirements in the balance sheet which cannot be extracted without a significant tax cost to the present owner(s).

This can be avoided by adding the surplus cash to the sale price, having it taxed at capital gains tax rates of 10-20%, instead of income tax rates up to 38.1%.

With the Chancellor of the Exchequer having to fund companies, employers and employees in so many different ways at the present time, he will be looking at ways this Autumn or next year to recover some of his largesse in the form of increased taxation and capital gains tax may be one of the areas he may focus on.

Do you need to act now?

So either selling your company now or creating a structure to enable you to do it in the future at the current rates of capital gains tax and reliefs could be worth considering.

For further information on the above do contact David Cane at [email protected] or phone 07749 080 806