Assessing the real performance of your targets
It is very important for companies Management to understand how to assess the real performance of the targets you want to buy.
To understand the real performance of a company, particularly in the context of a business sale/acquisition, it is essential to use relevant financial indicators:
– Earnings before interest and taxes (EBIT)
– Earnings before interest, taxes, depreciation and amortization (EBITDA).
EBITDA is often used to assess a company’s ability to generate cash from current operations, which is a key indicator of its financial health. In France, EBITDA is comparable to EBE (Gross Operating Surplus), a similar indicator used in French accounting standards:
Rather, they are unconventional indicators that often require adjustments to provide a clear picture of economic performance.
Now, let’s get back to these adjustments:
- For a more in-depth analysis, companies can carry out a “Quality of Earnings” review (see my Tuesday post). This approach consists of examining past financial results over two or three years to determine the regularity and normality of these results
- Recurrence adjustments: These adjustments aim to eliminate the impacts of non-recurring items on financial results. (e.g. an exceptional charge for a single legal dispute which is not likely to recur, exceptional income from the sale of an asset…).
- Pro forma adjustments: These adjustments are made to reflect the financial impact of changes in business structure, such as acquisitions or divestitures of businesses
- Stand-alone adjustments: When part of the business is sold or a new entity is created, it may be necessary to adjust the results to reflect independent operating costs. For example, if a division is sold, it might require its own information systems or legal and tax support functions that were previously shared with the rest of the company. These additional costs must be taken into account to properly assess the economic performance of the division as an independent entity
One of the key approaches in this process is a specific analysis which aims to assess economic performance by isolating the effects of any expansion or reduction of the company’s scope of activity.
Thankfully, specialized firms exist to do this type of very in-depth analysis for you and ours is perfectly qualified to help.
Please feel free to contact us if you need any assistance.
