Suppose, you are a sweet shop owner in Pune. You make a profit, pay rent, electricity, staff and taxes. What's left is your profit. However, if someone were to buy your shop, he or she would not simply want to know how much profit you make – he or she will want to find out how well your core business works before tackling all the other expense items. That's exactly what the EBITDA tells them. EBITDA is the acronym for Earnings Before Interest, Taxes, Depreciation and Amortization. It is a neat and tidy representation of what your company really earns from your business and it's the very first number that any serious buyer will ask for.

 

The first place to begin in any M&A discussion is from a business's EBITDA.

Whether you're talking to a private equity firm, a strategic investor, or a competitor, when they're on their side of the table, they're not yet worrying about your brand name, office decor, or website. Their thinking is, “Is this business really making real money?”

 

EBITDA addresses this question un altered by how the business is financed (interest), by the tax laws of the country (taxes), or by accounting practices of assets (depreciation and amortization). It provides a common yardstick for comparing. Manufacturing companies in Pune and Hyderabad, with different loan structures and tax benefits, can be compared fairly with the help of EBITDA.

 

This is typically the first due diligence stage undertaken by buyers who are using CA Dhiraj Ostwal M&A. It provides the foundation for all the valuation discussion. In a case of strong and growing EBITDA, you are in a good negotiating position. When it doesn't match, they will either reduce the price they offer or they will simply walk away.

 

The Formula You Need to Know

Let's get to the nitty-gritty with the formula all M&A advisors know:

Net Profit + Interest + Taxes + Depreciation + Amortization = EBITDA

Or alternatively:

Operating Revenue − Operating Expenses (excluding interest, taxes, D&A) = EBITDA

The implications of this valuation for the reality of it are as follows:

Business Valuation = EBITDA x Industry Multiple

Let's say that you are a Pune based logistics company with an EBITDA of?  The number of industry trades at 6x and 1.5 Crore, so your indicative valuation is what?  9 crore.

 

Some IT Services Pune companies might get 8x – 12x for the "multiple" while the traditional manufacturing may get 4x – 6x. That's where an expert CA in Pune for M&A shines they will know the correct benchmark for your industry and make sure that your EBITDA is displayed correctly.

 

Rather than simply considering the net profit, why do buyers refuse to look at it?

So, many business owners ask themselves this question: "Why the buyer keeps going back to EBITDA if my Net Profit is good?

 

It's easy to say what the solution is. Net profit can be manipulated, but legally! A promoter with a very high salary decreases net profit. High interest costs will be reflected in a company that borrows for expansion on a large scale. Let's say a business just purchased new machinery, it will have high depreciation. These are all non-essential issues to the basic health of the business.

 

EBITDA takes all that out of the equation. A buyer is asking himself the question, “How much would this business have produced with my own structure, financing, and tax scenario?”

 

Often, when the business owner is not aware of their EBITDA, they are amazed to see that the underlying business is much more attractive when all non-cash charges and financing costs are added back.Business owners whose net profit are not their EBITDA are often surprised to know that the underlying business may be far more attractive when all non-cash charges and financing costs are added back. This “normalisation” is an important facet in preparation for a deal.

 

EBITDA Normalisation A Game Changer for Sellers

What most sellers are unaware of is that the EBITDA you present to your buyer doesn't need to be the raw data on your P&L. The amount of EBITDA should be the adjusted or normalised EBITDA as the business would perform under arm's-length operating conditions.

 

Common adjustments include:

Corporation Tax relief for excess promoter salary (over market value)

• Restructuring related costs for the Company

• Eliminating personal costs incurred via the company

Adjusting for transactions with related parties at non-market value

 

Normalised EBITDA Formula:

Normalised EBITDA is the reported EBITDA plus one-time costs or expenses minus excess owner compensation and minus any non-recurring income.

For instance, a Pune-based family-owned FMCG distributor was showing an EBITDA of? 80 lakh. Once the normalisation is done by our team at CA Dhiraj Ostwal M&A, the adjusted EBITDA was R1.5 billion. The change in the valuation of the deal by 1.1 crore. That's a? The difference in the 1.8 crore at just 6x multiple.

 

The true meaning of EBITDA to Buyers

A buyer is considering three years of EBITDA data at the same time, considering four factors:

 

Is there consistency or is EBITDA erratic year-on-year?  A healthy, increasing EBITDA indicates that the business runs well.

EBITDA Margin = EBITDA/Revenue × 100 The typical healthy range for a 20%+ margin is considered to be 20%+ EBITDA margin. Less than 10% signals issues with cost control.

• Is it possible for EBITDA to increase with additional investment?  Or is there a ceiling already? 

Is Sustainability the EBITDA from real recurring revenue or a one-time contract? 

That's why Merger & Acquisition strategy consulting experts, such as our firm, spend weeks assisting you in creating a clean, well-documented EBITDA story before presenting to prospective buyers. The story is as important as the number.

 

What steps can you take to enhance your EBITDA prior to selling?

If you are looking to sell your business within 1–3 years, begin to build up your EBITDA now. The following is a simple M&A Readiness Score framework used by M&A readiness CA practitioners:

The M&A Readiness Score is calculated as follows: M&A Readiness Score = (Financial Cleanliness x 0.4) + (EBITDA Growth Trend x 0.35) + (Operational Documentation x 0.25)

Here are some tips on how to boost your score:

Split personal and business finances as soon as possible

Minimize reliance on a few big clients

Record revenue from recurring contracts with a high level of detail.

Purchase accounting software for clean trail.

Engage with a CA for M&A at least 18-months prior to sale in Pune.

These actions not only enhance EBITDA, but they also help to convey to the buyer that your business is properly managed and command a top dollar multiplier.

Quick Background on Pune Mergers & Acquisitions Market in 2024-25

The mergers and acquisitions business in Pune, specifically in areas like information technology services, automotive ancillary industry, logistics, and healthcare has been very active with domestic and international companies looking for buy opportunities. All of our term sheets prepared at Dhiraj Ostwal M&A Services typically start with a one-pager of EBITDA and a trend of three years. The questions that buyers typically ask relate to the EBITDA Bridge, where you have gone from?  X in year one to?  Y in year three, and what made the difference?  If you cannot show the bridge clearly, buyers will be anxious.

Want to Discover Your True EBITDA Value?

• Whether you're looking at a buyout, a joint venture, or a partial sale, your first step will always be to figure out your real EBITDA number. Many business owners tend to overestimate or underestimate their true EBITDA, but both are equally detrimental in the deal.

• Need personalized M&A advice? Call or WhatsApp us at 7020045454. We will talk about your deal confidentially.

• At CA Dhiraj Ostwal M&A, one of the M&A readiness CA firms in Pune, our team will analyze your figures, help you normalize your EBITDA, and prepare you for the best results.

What to Remember from This Article

• EBITDA is more than an accounting concept; it's how serious buyers measure your business. It filters out distractions, allows comparisons, and is directly tied to your valuation. Cleaning, understanding, and improving your EBITDA should be your top priority before embarking on the M&A process.

• If you combine these efforts with the right advisor, you will transform from an average seller to a business with an attractive story and a justifiable valuation.

• Need personalized M&A advice? Call or WhatsApp us at 7020045454. We will talk about your deal confidentially.