This article will help you understand a simplified valuation methodology—earnings before interest, taxes, depreciation, and amortization (EBITDA) times a multiple, how to increase EBITDA and the multiple, how to compare rates of return from mergers and acquisitions to internal rates of return, and how much diligence may be performed before you close the transaction. Here’s an excerpt from the article:
“With M&A, if you acquire a company with positive EBITDA, the EBITDA of your company increases. However, that does not mean you should pursue every transaction just because the seller has positive EBITDA. You could also increase your company’s EBITDA by acquiring a seller with negative EBITDA that can be transformed to positive EBITDA via synergies with your business. You should be constantly evaluating the rate of return expected from various acquisition targets as well as pursuing a transaction compared to investing that money in internal growth.”
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BKD is a Principal Partner of the Construction Financial Management Association (CFMA). This resource first appeared in its magazine, CFMA Building Profits, and was posted on bkd.com with permission. BKD Trusted Advisors™ are regular contributors to this publication.