If you want to start a business and don’t really know where to start, I suggest learning a lot about money, economics, and finance. I know it sounds trite and boring, but this is definitely stuff you should focus on. Money, economics, and finance run the world, especially the world of business. Without money, absolutely nothing gets done. Without proper financial planning, that money gets wasted. Understanding the macro-economic environment is the key to knowing why everyone does what they do. I’m no business major. As of right now I’m studying to earn a degree in health science. But there is one concept which has helped me in business, that I think my readers should learn about. This concept has helped me achieve a lot, and it’s what motivated me to start this blog. This concept is two pronged: the concepts of EBITDA and EBITDA multiples. I know, it sounds like finance-bro jargon, but it’s helpful and important if you want to understand the world of making money.
What are EBITDA Multiples?
To know what EBITDA multiples are, you need to first know what EBITDA is. EBITDA stands for earnings before debt and taxes. It’s basically how much profit the business makes in any given time period. You can learn more about it here. The EBITDA multiple, refers to the number by which you need to multiply the EBITDA to get the value of the business. Obviously, this number changes depending on the business being discusses. It’s a very useful number once you get a sense for it. You can learn more about EBITDA multiples here.
Why do EBITDA Multiples matter and how do they help me?
The truth is EBITDA multiples don’t matter on their own. They’re descriptive, and they’re made up based on how much confidence people have in a given business. But given that they exist and are used by people in business, you can use them to help you. EBITDA multiples are tell you how valuable different types of businesses are. This means that if you can learn how profitable a company is, along with how much it sold for, you can learn its EBITDA multiple. That means you have a rough idea of how much risk someone is willing to take buying the business (higher multiple = more risk) and how hard it is to make money in that industry (higher multiples with lower nominal values are hard industries). You generally want slightly lower multiples if you’re starting a small business. This means that it’s easier to start something that you can live on.
A business is only worth what people will buy it for
If people aren’t willing to buy your business, it doesn’t actually have any resale value. You’re going to have to wait for the revenue to trickle in as a result of your site’s monthly earnings. Remember this fact as you start a business. If you start a brand that’s totally personal or too unconventional, you might find it difficult to get off your hands. So, while EBITDA multiples are indicative of what most people think businesses are worth, they might lead to disappointment if you’re banking on selling a small business. You want to use EBITDA multiples to evaluate businesses rather than
Solution: build a business that you can live with
This is one of the best ways to hedge against problems in the future. You want to build a business that’s based on your reality, and that fits into it well and nicely. For me, that business is writing and life coaching. For others it might be different. It all depends on what people are most interested in and able to do. I would say that while content creation is a grind, it’s one of the few side-hustles that allows you to create a full-sized business with minimal upfront costs.
Solution: set a budget and learn how to invest
You want to know how much money you can spend and learn how to invest your money. The sooner you do this, the better off you are. Having investments and building wealth is one of the keys to a bright future. Most wealth is stored in real estate and business assets. Build those and you will find yourself well ahead of the average man. EBITDA multiples will tell you what to build, but also how long you should spend building. EBITDA multiples will tell you if you’re succeeding, and most importantly they’ll tell you when to quit.
Think about your position
This is really the most important thing about EBITDA multiples. They allow you to evaluate your position as a businessman, and make the moves required to do the work that gets you the wealth you need. So, whenever you’re looking at EBITDA multiples, think about your ability to match the output of your potential competitors. Do they have more capital than you? Are they smarter? Think about your own needs. Are you looking for cashflow? Then you want something with an EBITDA multiple of 0.5 the drives a lot of cashflow. On the other hand, that might be pretty tough to find in a high-interest rate environment.
Starting a business is one of the best things you can do for yourself. But it can lead to a lot of pain and suffering if you don’t know what you’re doing. Knowing what you’re doing involves research and planning. You want to know what kind of demand you’re driving and make the right moves to create a real, sustainable company. In this high-interest-rate environment, you want to stick to the fundamentals. Create stuff that’s tried and true and do it well. Take people’s market share and get what you need out of life. Learn about the EBIDTA multiples of different industries and think carefully before executing. The more carefully you think and plan things out, the better you’re going to do, and the more success you’re going to have.
Thanks for paying attention.
