EBITDA and Other Scary Words (SERIES: MBA in a Day 2018)

Practical and entertaining education for
attorneys, accountants, business owners and
executives, and investors.
2

The material in this webinar is for informational purposes only. It
should not be considered legal, financial or other professional
advice. You should consult with an attorney or other appropriate
professional to determine what may be best for your individual
needs. While Financial Poise™ takes reasonable steps to ensure
that information it publishes is accurate, Financial Poise™ makes
no guaranty in this regard.
DISCLAIMER
3

MEET THE FACULTY
MODERATOR:
Jonathan Friedland Sugar Felsenthal Grais & Helsinger
PANELISTS:
Richard Claywell Office of J. Richard Claywell CPA
Jacen Dinoff KCP Advisory Group LLC
Melissa S. Kibler Mackinac Partners
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ABOUT THIS WEBINAR
This webinar explores the ins and outs of financial language and how you can navigate the seeming
labyrinth of a language that can sound foreign and in some ways counterintuitive. This webinar teaches
the correct use of EBIT, EBITDA and EBITDAR while also dealing with concepts like Cap Rate vs.
Capital Cost. This webinar also sheds light on issues with ROI and Payback among other valuation
tools and explain what a Cash Conversion Cycle looks like for your business.
This webinar is delivered in Plain English, understandable to you even if you do not have a
background in the subject. It brings you into an engaging, even sometimes humorous, conversation
designed to entertain as it teaches. And, it is specifically designed to be viewed as a stand-alone
webinar, meaning that you do not have to view the other webinars in the series to get a lot out of it.
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ABOUT THIS SERIES
“If you don’t know your numbers, you don’t know your business.” This is a common refrain that is equally applicable to
attorney and other consultants who work with businesses.
This webinar series is designed for you if you are a startup founder, business owner, executive, investor, attorney or consultant
who, though not a finance or accounting professional, finds herself needing to understand finance and accounting. It won’t make
you an expert but it will give you the tools you need to speak with experts in order to get more out of them and it will provide a
solid foundation on which you can build. Packed with illustrative examples, helpful anecdotes and real-world case studies, this
series teaches you some of the key take things you need to understand about finance and accounting.
As with every Financial Poise Webinar, each episode is delivered in Plain English understandable to investors, business owners,
and executives without much background in these areas, yet is also valuable to attorneys, accountants, and other seasoned
professionals. And, as with every Financial Poise Webinar, each episode brings you into engaging, sometimes humorous,
conversations designed to entertain as it teaches. Each episode in the series is designed to be viewed independently of the other
episodes so that participants will enhance their knowledge of this area whether they attend one, some, or all episodes.
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Dates shown are premiere dates; all episodes will be available on demand after
their premiere date.
EPISODES IN THIS SERIES
Episode #1 EBITDA and Other Scary Words 3/15/18
Episode #2 How to Read a Balance Sheet – 4/12/18
And Why You Care!
Episode #3 The KPI- Cash Flow Modeling and 5/10/18
Projections
Episode #4 Where Did All My Profits Go? Mastering the 6/7/18
Concept of Working Capital
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Episode #1 EBITDA and Other Scary Words

FINANCIAL METRICS
a. Financial / Accounting Ratios
b. Inputs for Financial / Accounting Ratios
9© 2018 by DailyDAC, LLC d/b/a Financial Poise Webinars™

FINANCIAL/ACCOUNTING RATIO
a. A relative magnitude of two selected numerical values taken from an
enterprise's financial statements.
b. Used to compare the strengths and weaknesses between/among
companies
c. By Whom?
i. By managers within a company
ii. By current and potential shareholders (owners) of a company
iii. By company’s creditors.

INPUTS FOR FINANCIAL/ACCOUNTING RATIOS
a. Values used in calculating financial ratios are derived from:
i. Balance sheet
ii. Income statement
iii. Statement of cash flows
iv. Statement of changes in equity.
b. Data contained in these statements is based on the accounting method
and accounting standards used
c. These statements provide certain key metrics

A BRIEF NOTE ON GAAP (GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES)
a. Collection of commonly accepted accounting rules and standards for
financial reporting.
b. Includes definitions of concepts and principles, as well as industry-
specific rules.
c. Designed to ensure that financial reporting is transparent and consistent
from one organization to another.
d. But not all terms/concepts are defined in GAAP, i.e., EBITDA

KEY METRICS
a. What is key varies by:
i. Point in lifecycle
ii. Industry
iii. Financial strength
iv. Purpose in considering

EXAMPLES OF SOME KEY METRICS
a. Gross Profit Margin
i. Compares cost of goods or services to income derived from those costs
ii. Tool to determine productivity when compared against others in same
industry
b. Current Ratio
i. Measures liquidity
ii. Total Current Assets / Total Current Liabilities
c. Working Capital
i. Total Current Assets - Total Current Liabilities
ii. Positive working capital means that company can pay off its short-term
liabilities. Negative working capital means company currently is unable to
meet its short-term liabilities with its current assets.

EXAMPLES OF SOME KEY METRICS (CONT.)
d. Debt/Equity Ratio
i. Measures the extent of leverage in a company
e. EBITDA (Earnings Before Interest, Taxes, Depreciation, and
Amortization)
i. Essentially, this is the net operating income of a company
ii. Can be used to analyze and compare profitability between companies
because it eliminates effects of financing and accounting decisions.
iii. Essentially, a measure of cash flow from operations, which is
available to service debt and make capital expenditures

SOME KEY METRICS FROM AN INVESTOR’S
PERSPECTIVE
a. Liquidity
b. Earnings Growth and Growth of Net Income
c. Return on Assets
d. Operating Cash Flow

THE INVESTOR’S PERSPECTIVE (CONT.)-
LIQUIDITY (BALANCE SHEET)
a. Can the company pay everything it needs to pay in the next year?
b. The current ratio compares current assets (assets that can be turned
into cash in the next year) with current liabilities (obligations that have
to be paid in the next year)
c. Rule of thumb: 2:1 ratio of liquidity to debt is good
d. Large, well-run company may have lower ratio cash control is good

THE INVESTOR’S PERSPECTIVE (CONT.) -
EARNINGS GROWTH AND GROWTH OF NET
INCOME (INCOME STATEMENT)
a. Is company growing?
b. Look across top and bottom lines of income statement. Top line and
bottom line should be growing, in a fairly parallel manner.
c. To the extent a company creates operating leverage (for example,
through economies of scale), bottom line can grow at a faster pace than
top line

RETURN ON ASSETS
a. Return on assets, return on equity, and return on capital = measures of
compared to amount of money being used to get those earnings.
b. Return on assets is an indicator of how profitable a company is relative
to its total assets.

OPERATING CASH FLOW (STATEMENT OF CASH
FLOWS)
a. How is the company generating cash?
b. Operating cash flow - $ used to pay for capital expenses = owner’s cash
flow or free cash.

SOME KEY METRICS FOR STARTUPS
a. Customer Acquisition Cost (CAC) & Lifetime Value of Customer
(LTV)
b. Churn Rate (number of clients who drop its services in a given period)
c. Revenue Run Rate (extrapolation of annualized revenue based on
current income levels)
d. Cash Flow/Burn Rate (speed with which a business uses up its cash
reserves to pay for overhead)
e. Fixed vs. Variable Costs
f. Breakeven Analysis

SOME KEY METRICS FOR LENDERS
Source: https://corporatefinanceinstitute.com/resources/knowledge/finance/assessing-debt-capacity/

SOME KEY METRICS FOR ACQUIRERS
a. Growth: Companies with much higher or much lower growth
(measured by their three-year compound annual growth rate in sales)
than the average are the most likely to become acquisition targets.
b. Profitability: Private companies with much higher or much lower
profitability (measured by their ratio of EBITDA to sales) than the
average are the most likely to become acquisition targets..
Source: https://www.forbes.com/sites/mattporzio/2016/10/03/6-key-financial-indicators-of-attractive-
acquisition-targets/#a46b5ce1ab35
© 2018 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 23

(CONT.)
c. Leverage: Private companies with much higher leverage (measured by
their ratio of debt to EBITDA) than the average are the most likely to
become acquisition targets. Public companies with much lower leverage
than the average are the most likely to become acquisition targets.
d. Size: Private companies that are much larger or smaller (measured by
total sales) than the average are the most likely to become acquisition
targets. Public companies that are much smaller than the average are
more likely to become acquisition targets.
Source: https://www.forbes.com/sites/mattporzio/2016/10/03/6-key-financial-indicators-of-attractive-
acquisition-targets/#a46b5ce1ab35

(CONT.)
e. Liquidity: Target companies have lower levels of liquidity (measured
their ratio of current assets to current liabilities) than non-target
companies.
f. Valuation: Public companies with lower valuation multiples (measured
by their ratio of enterprise value to EBITDA) than the average are the
most likely to become acquisition targets.
Source: https://www.forbes.com/sites/mattporzio/2016/10/03/6-key-financial-indicators-of-
attractive-acquisition-targets/#a46b5ce1ab35

EBITDA – DEFINING & DEMYSTIFYING
a. Earnings Before Interest Taxes Depreciation & Amortization
b. Used to measure a company's financial strength by approximating cash
flows, without factoring in tax conditions or accounting decisions.
c. Focuses on measuring financial strength by removing expenses that are
not part of a company's core functions.

EBITDA – HISTORY & USE
a. Popularized in the 80s in leveraged buyouts ("LBOs"), when acquirers
looked to assess profitability of distressed businesses, and wanted to
determine whether company acquired could pay down debts quickly
after restructuring.
b. EBITDA can be used by management to compare company
performance against similar companies that may operate in different tax
brackets or have different capital structures.

EBITDA – BREAKING DOWN EACH
COMPONENT
a. Earnings
i. The net calculation concluded by EBITDA–essentially the
company's Net Profit
1. Often referred to as the "bottom line" - Net Profit is calculated by
subtracting total expenses from total revenues

COMPONENT (CONT.)
a. Before Interest
i. Costs incurred for financing
ii. considered non-operating expense on company's income statement
iii. Represents interest payable for any type of financing (bonds, loans,
convertible debt, lines of credit, etc.)

COMPONENT (CONT.)
a. Before Taxes
i. Taxes payable vary company to company, based on jurisdictions
operating, structure of organization, etc.

COMPONENT (CONT.)
a. Before Depreciation
i. Captures economic and functional decline in the value of a tangible
asset (such as property, plant, and equipment (“PP&E”)) over the
asset's expected life of the asset.
ii. Multiple methods of depreciation used under US GAAP to
iii. May also be differences in how an asset's decrease in value is
calculated for financial and tax reporting
iv. Considered a non-cash expense because no cash outflow associated
with asset's declining value (cost is purely economic)

COMPONENT (CONT.)
a. Before Amortization
i. Representation of declining value of long-lived intangible asset over
its expected economic life.
ii. May include intangibles such as capitalized software, or acquired
intangible assets such as trade names, customer relationships, and
technology

ADVANTAGES OF EBITDA
a. Simplicity
i. Easy metric for investors or others conducting due diligence to
understand company's ability to make money.
b. Comparability
i. EBITDA creates means of comparing multiple companies in an
industry against one another by stripping out variable factors
(interest, taxes, depreciation, amortization).

DISADVANTAGES OF EBITDA
a. Inaccuracy
i. By not factoring in interest, taxes, etc., EBITDA may not create a
full picture of a company's actual ability to operate profitably.
b. Misuse
i. EBITDA may be manipulated to make company appear more
profitable than it actually is.

DISADVANTAGES OF EBITDA (CONT.)
“EBITDA is one of the most deceptive and overused financial terms in
business and investment finance. In a weak attempt to create a level playing
field between two comparable companies in the same industry, EBITDA
instead creates confusion by excluding important metrics like working capital
changes. EBITDA cannot be used alone to create an accurate cash flow picture
we need to move from EBITDA to actual cash flow.”
-The Business Ferret (http://thebusinessferret.com/key-financial-metrics/ebitda-
to-cash-flow/)

Variations on a Theme – EBIT; EBITDAR;
EBITDARM

EBIT
a. Earnings Before Interest & Taxes
b. Leaves Depreciation and Amortization as part of calculation
c. May be preferable to measure actual earnings of companies with high
capital expenditures ("CAPEX" - $$$ used to acquire or maintain fixed
assets like land, buildings, equipment)

EBITDAR
a. Earnings Before Interest Taxes Depreciation Amortization &
Rent/Restructuring costs
b. Same calculation as EBITDA, but further removes rents and
restructuring costs from equation
c. Useful for companies contemplating restructuring

EBITDARM
a. Earnings Before Interest Taxes Depreciation Amortization Rent &
Management fees
b. Modifies EBITDA calculation to remove additional factors of rent and
fees associated with property management
c. Frequently used when company has rent and management fees
representing a hogher-than-usual percentage of operating costs (Real
Estate Investment Trusts ("REITS"), hospitals, nursing facilities)
d. Also used by credit ratings agencies

ENTERPRISE VALUE (EV)
a. EV measures a company’s total value, and looks at entire market value
rather than just equity value.
b. In essence: the effective cost of buying a company, or the theoretical
price of a target company.

ENTERPRISE VALUE (EV) (CONT.)
Source:
https://corporatefinanceinstitute.com/resour
ces/knowledge/valuation/what-is-enterprise-
value-ev/

ENTERPRISE VALUE (EV) & EBITDA –
CALCULATING ENTERPRISE MULTIPLES
a. Once EV & EBITDA are known, they can be used in concert to
determine an Enterprise Multiple
i. Ratio used to determine the value of a company.
b. Enterprise Multiple looks at a company the way a potential acquirer
would, taking into account the company's debt

ENTERPRISE VALUE (EV) & EBITDA –
CALCULATING ENTERPRISE MULTIPLES
(CONT.)
a.
b. Uses:
i. Investors/buyers can use to determine whether company is
over/undervalued
ii. Compare valuations of multiple companies
iii. Calculating offer price for company by prospective purchaser
(example, offering 4x EBITDA)

ABOUT THE FACULTY
Jonathan Friedland is a Partner with Sugar Felsenthal Grais & Helsinger, LLP, with offices in Chicago and New York. Jonathan regularly
advises private funds in their M&A activity and private companies in their day-to-day affairs. Jonathan has extensive experience in guiding
companies and their boards through a variety of challenging situations, including in Chapter 11 and other insolvency regimes.
Jonathan graduated from the SUNY Albany, magna cum laude, in 1991 (after three years of study) and from the University of Pennsylvania
Law School in 1994. He clerked for a federal judge before entering private practice. He was an Adjunct Professor of Strategic Management
at the University of Chicago’s Graduate School of Business for several years and was the 2006 Clayton Center for Entrepreneurial Law
Visiting Professor of Business Law at the University of Tennessee College of Law. Jonathan has been profiled, interviewed, and/or quoted in
numerous publications, including Buyouts Magazine; Smart Business Magazine; The M&A Journal; Inside Counsel; LAW360;
BusinessWeek.com; The Bankruptcy Strategist; Dow Jones Daily Bankruptcy Review; Bankruptcy Court Decisions; Dow Jones LBO Wire;
and The Daily Deal. Jonathan is also lead author and editor of several significant treatises, several chapters in other treatises, and hundreds
of articles on law and business. Jonathan holds the highest possible rating from Martindale-Hubbell (AV® Preeminent™) and AVVO
(10/10), has been repeatedly recognized as an Illinois “superlawyer” in multiple areas of practice, including Business/Corporate Law and
Bankruptcy & Creditor/Debtor Rights, has been named several times as a “Leading Lawyer” by Leading Lawyers Magazine, and has received
several other similar distinctions. He is also the founder of DailyDAC/Financial Poise.
JONATHAN FRIEDLAND
jfriedland@sfgh.com

ABOUT THE FACULTY
RICHARD CLAYWELL
richard@biz-valuation.com
Richard is a practicing Certified Public Accountant, and holds the additional designations of Accredited in Business
Valuation, Accredited Senior Appraiser, Certified Business Appraiser, International Certified Valuation Specialist,
Certified Valuation Analyst, Certified in Merger & Acquisition Advisor, Master Analyst in Financial Forensics, Certified
in Fraud Deterrence, Accredited in Business Appraisal Review. Richard has been valuing closely held companies since
1985. Richard’s practice is restricted to business valuation, economic damages, profit enhancement and exit planning.
Richard has been an instructor for the National Association of Certified Valuation Analysts for many years, has been an
instructor for the Internal Revenue Service and the International Association of Consultants Valuators and Analysts
(IACVA). Richard is currently the Director of Education for the IACVA and is responsible for the business valuations
materials being taught in 55 countries. Richard has taught business valuation or economic damage courses in China,
Korea, Taiwan.
Richard has performed over 1,000 business valuations since 1985. Richard has testified in Texas County Court, Texas
State Court, Bankruptcy Court and Texas State Courts. Richard has given testimony in economic damages (lost profits),
shareholder disputes, personal injury, wrongful termination and divorce.

ABOUT THE FACULTY
JACEN DINOFF
jdinoff@kcpadvisory.com
Jacen Dinoff is the co-Founder and Chief Executive Officer of KCP Advisory Group, a leading business advisory firm
specializing in providing creative solutions to rehabilitate businesses. Mr. Dinoff is highly-regarded as a corporate restructuring
and turnaround management advisor with hands-on accounting, finance, management and operations experience that
complements his technical expertise in bankruptcy case administration and financial advisory. Mr. Dinoff’s career has included
engagements in financial and operational restructurings, asset divestitures through sale and liquidation, and senior
debtor/creditor advisor roles for many well-known companies, both publicly and privately held.
Mr. Dinoff is a Certified Turnaround Professional. He holds a B.S. in Business Administration from the Peter T. Paul College
of Business and Economics at the University of New Hampshire, and an M.B.A. in Finance from Bentley College. He is an
active member of the Turnaround Management Association and American Bankruptcy Institute and is a frequent speaker and
contributor at industry events and media outlets.

ABOUT THE FACULTY
MELSSA S. KIBLER
mkibler@mackinacpartners.com
Melissa S. Kibler is a senior managing director of Mackinac Partners in Chicago and has more than 25 years of experience
providing financial advisory, restructuring and turnaround management services to Fortune 500 and mid-sized companies and
their stakeholders. She also has extensive investigative, litigation and valuation experience, including insolvency-related litigation,
avoidance actions, fraud investigations, merger and acquisition disputes, director and officer claims, and other commercial
litigation support. Ms. Kibler was most recently a senior managing director in the Chicago office and an executive committee
member of Mesirow Financial Consulting following its 2004 acquisition of the corporate recovery practice of KPMG LLP, where
she had served as partner-in-charge of the Midwest Region Corporate Recovery practice and the Pacific Northwest Corporate
Recovery and Forensic and Litigation Services practices since 1999. Prior roles in professional associations include president of
ABI, treasurer of the American College of Bankruptcy, director of INSOL International (as ABI’s representative), and chair of
the AICPA Bankruptcy Task Force. Ms. Kibler holds CPA, CIRA, CTP, CFF and CDBV certifications. She was named a
Consulting Magazine 2013 “Women Leader in Consulting;” an Illinois CPA Society 2011 Women to Watch Award recipient; the
IWIRC 2010 Woman of the Year in Restructuring; a Crain’s Chicago Business 2004 “40 Under 40; and the 2003 “CIRA Gold
Medal Winner.” She earned her B.A. in accounting summa cum laude from Texas A&M University and her M.B.A. from
Southern Methodist University, graduating first in her class.

The material in this presentation is for general educational
purposes only.
It has been prepared primarily for attorneys and accountants for
use in the pursuit of their continuing legal education and continuing
professional education.
IMPORTANT NOTES

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About Financial Poise™
www.financialpoise.com
DailyDAC LLC, d/b/a Financial Poise™ provides continuing education to
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EBITDA and Other Scary Words (SERIES: MBA in a Day 2018)

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