The most common question we are asked by potential sellers is what is the EBITDA multiplier for my store?
The EBITDA (pronounced e-BIT-da) is an acronym for earnings before interest, taxes, depreciation, and amortization. The multiplier is calculated by dividing the sale price by the annual EBITDA. For example, a store sold for $2.0 million and had EBITDA at the time of sale of $325,000…
The EBITDA multiplier is 6.15x ($2,000,000 $325,000). Theoretically other stores with
EBITDAs of $325,000 also have a value of $2.0 million. This is the foremost method used by buyers when formulating an offer. Historically EBITDA multipliers have ranged from a low of 5x to a high of 10x. Recent sales are at the upper end of this range, although a 10x multiplier is rare and applies to top quality stores. . There are a lot of different factors that affect the value of an operating c-store. These include:
- Is the real estate owned or leased; fee properties have higher EBITDA multipliers.
- Does the property require large capital improvements (new tanks, store renovation, etc.)? Most buyers will estimate a value using the EBITDA multiplier but make deductions for the capital expenditures. Using our example above if the c-store had EBITDA of $325,000 and required
$500,000 for new tanks, its value would be $1,500,000 and the effective EBITDA multiplier would be 4.6x ($1,500,000 $325,000).
- Is the store part of a chain of stores? Multi-store sales generally sell for higher multipliers than single sites since risks are spread across multiple sites.
- Interest rates and financing, low-interest rates increase the purchasing
power of the buyer, which increases the EBITDA multiplier.
- Petroleum supply agreements, if the property is being offered free of all contracts most buyers will pay more for the store.
- Buyer synergies, if the buyer can incorporate the store(s) into their network without increased overhead and they realize operating efficiencies, the buyer’s net income will increase more than the store’s EBITDA. In these instances, the buyer will pay a premium.
How EBITDA is calculated is just as important as using the correct multiplier. When we meet with an owner who is considering selling, we review three to five years of Profit & Loss Statements. . Our first step is to calculate EBITDA by using the reported net income from each year and “add back” the interest, income taxes, depreciation, and amortization expenses. For small operators, additional add-backs are also applied.
Common add-backs include wages paid to family members that do not work at the store, rent paid to a related entity, and personal expenses that are included in the store expenses (travel, entertainment, personal vehicles). Most buyers understand the add-backs for interest, taxes, depreciation, amortization, and rent. Buyers lose confidence in the integrity of the EBITDA if there is a long list of add-backs and they will be more conservative in their offers.
Calculating your store’s EBITDA correctly will result in maximizing its value. We review hundreds of financial statements each year and can provide the expertise to develop an accurate EBITDA and suggested price for your store. Contact us today, we would like to meet with you and learn more about your operation.
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