A "good" EBITDA for a small business isn't a single number but a strong EBITDA margin (EBITDA divided by revenue) often falls between 15% and 25%, though it varies by industry (tech can be higher, retail lower). For valuation, a typical EBITDA multiple (how many times EBITDA a business sells for) might be 2x to 5x for smaller businesses, depending on stability, growth, and market. A higher margin and a higher multiple generally indicate better financial health and appeal to buyers.
Generally speaking, a good EBITDA margin for manufacturing businesses falls between 5% and 10%.
The Rule of 40 SaaS states that the sum of a healthy SaaS company's annual recurring revenue growth rate and its EBITDA margin should be equal to or exceed 40%. It is a measure of how well a SaaS balances growth with profitability.
Limited ability to invest in growth: A low EBITDA margin means that a company has limited profitability, which can make it difficult to invest in growth initiatives such as product development, marketing, and hiring.
EBITDA – The primary measure of cash flow used to value mid to large-sized businesses and does not include the owner's salary as an adjustment.
For example, a business with an annual revenue of $200,000 and a valuation multiple of 2.5 would have a value of $500,000. However, the accuracy of a revenue-based valuation relies heavily on selecting the right multiple for your business.
If your business has achieved $1MM in revenue, congratulations on beating the odds (estimated by the SBA), which say that 30% of small businesses fail within the first year, 50% within five years and 66% during the first ten.
A good EBITDA margin for a company depends on its industry, but generally speaking investors have a high degree of interest in companies with over 20% EBITDA margin.
It dictated that a company's revenue growth rate plus its EBITDA margin should be equal to or greater than 40% (20% revenue growth + 20% EBITDA margins = 40%). This Rule was a guiding star for many SaaS CEOs, illuminating the path to balancing growth and profitability.
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a financial metric showing a company's operating profitability by adding back non-operating expenses (Interest, Taxes) and non-cash expenses (Depreciation, Amortization) to net income, offering a clearer view of cash flow and making it easier to compare companies with different capital structures or tax situations, but it's not a perfect measure as it ignores real costs like asset wear-and-tear. Think of it as a simplified "scorecard" of core business performance before financing, taxes, and accounting entries.
According to Buffett, EBITDA is not reflective of a company's true financial performance due to neglecting capital expenditures (Capex) and changes in working capital, among various other issues.
Likewise, EBITDA numbers are easy to manipulate. If fraudulent accounting techniques are used to inflate revenues while interest, taxes, depreciation, and amortization are taken out of the equation, almost any company could look great.
Income Approach:
For example, if a company earns $500,000 in revenue with a 20% net profit every year, you could estimate the business value around $2.5 million, based on the cash it consistently generates.
High-end items (e.g., watches, cars, yachts) can have valuations manipulated through fictitious invoices or staged private sales. Criminals artificially raise or lower reported prices, disguising illicit proceeds as legitimate gains or concealing true wealth.
This preference reflects his belief that understanding the core earnings power of a business is crucial for making informed investment decisions. In summary, Buffett's preference for EBIT over EBITDA is grounded in his commitment to value investing and understanding a company's true profitability.
EBITDA and gross profit measure profit in different ways. Gross profit is the profit a company makes after subtracting the costs associated with making its products or providing its services, while EBITDA shows earnings before interest, taxes, depreciation, and amortization.
Critics point out that EBITDA is not a true measure of cash flow from operations. It doesn't account for capital expenditures, changes in working capital, or financing decisions.