This week I did my annual pilgrimage to Washington DC for finance training with the National Association of Broadcasters (NAB). I’ve done this training for years and in the process have found a bit of a niche with broadcasting and media businesses. I now work with Gannett, NBCUniversal, Comcast, and A & E Networks. The NAB is a not-for-profit organization that supports broadcasting for both television and radio. They lobby with the government for the interest of these groups. I always enjoy these classes because the attendees are often small radio and TV business owners and managers. Their issues and challenges are similar to mine as a small business.
The class this year was great. There were a lot of questions and discussion and even some debate with this group. We analyzed the financials for CBS and went over the income statement, balance sheet, and statement of cash flow (well the cash flow was very brief…not enough time).
Many topics came up in the class, two interesting topics were EBTIDA and business valuation. In these classes I talk about the shift by financial analysts from EBTIDA to free cash flow. When I do this most managers I train nod their heads acknowledging that their business is shifting to free cash flow as well. The common problem here is most managers don’t understand the cash flow statement let alone the free cash flow metric. It’s always enlightening to hear about this shift to free cash flow from EBITDA caused by financial fraud issues and the 2009 banking/financial crisis.
The one place where EBITDA is still a key metric is in the area of valuation. EBITDA multiples is the most common way we value businesses. Every industry has a typical multiple of EBITDA to value its business. For example, the software multiple may be 10 where as a small manufacturer can expect a multiple closer to 5. So if your business has an EBITDA of $1 million your value would likely be close to $10 million (software) plus net asset value or $5 million (small manufacturer) plus net assets. These multiples are not stagnant, they change with the economy and shifts with investor’s interest in industries.
I recently finished the EBITDA Toolkit for Harvard Business Press, available through HBR.org if you would like more information on this topic. This toolkit provides a detailed description of the metric or financial tool with actual spreadsheets and demonstrations on how to calculate EBITDA.
The visit to DC was great. The night after the training I could not get a flight out so I decided to hit the Nationals vs. Mets game. Dinner that night was a Nationals ballpark hot dog. What a great setting and stadium, the only downside was the home team lost 7-3. It was great weather for baseball and finance at our nation’s capital.