However, this is the industry terminology that is used and what it means is that there must be enough working capital in the business for it to continue operations at the normal level without the Buyer needing to add more. It also means that all the long-term debts (i.e. Covid Loans, long-term bank loans, etc as well as corporation tax) are part of the Seller's capital structure and need to be cleared on or before closing (or provision made to pay them as in the case corporation tax). Clearing debt will obviously affect the cash that the Seller receives at closing as the debt will either be paid out of excess cash/working capital (see the chapter on working capital) or deducted from the closing payment. However, these debts on the balance sheet do not affect the 'Enterprise Value' of the business. This is the ability of the business to generate profit, which is calculated by the various valuation methods. They are simply the way the Seller financed the business and will be cleared out of the Seller's funds (excess cash or their closing payment) at closing usually.
Normalised EBITDA Calculation Example
The following example is for a CNC machine shop in order to capture as many attributes as possible including capital equipment refresh:
CNC Machines LTD - Data Points
- Operating Profit last 12 months - £750K (for simplicity, we will assume this is known and just use this figure, typically this analysis is much more nuanced and we will look at the other periods). - Owner takes £12K in salary and £80K in dividends. We have determined a reasonable market salary for his replacement is
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