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STREET SMARTS

Norm Brodsky Explains Turns of EBITDA

What are turns of EBITDA, and why should you care? Our columnist explains.

Norm Brodsky is a veteran entrepreneur.

Dear Norm,
I have learned a great deal from your ongoing saga of selling CitiStorage, but I don't understand the concept of turns of EBITDA. Could you explain it?

-- Thomas S. Johnson, commercial real estate agent
Prudential Fox & Roach, Chadds Ford, Pennsylvania

Turns of EBITDA (earnings before interest, taxes, depreciation, and amortization) is just another way of saying multiples of EBITDA. The phrase is used to characterize the amount of debt a lender puts into a deal. In the days of free-flowing credit (pre -- July 2007), banks were willing to lend as much as five and a half turns of EBITDA in senior debt (that is, the debt that is paid off first in a liquidation). These days, banks are more risk averse, and so you can get three turns at most. Why is that important? Because the amount of senior debt determines how much leverage (the ratio of debt to equity) there can be in a deal. That affects, among other things, the price you can expect from a buyer who does leveraged transactions, which usually has an effect on what others will pay as well.

Norm Brodsky (brodsky13@aol.com) is a veteran entrepreneur. His co-author is editor-at-large Bo Burlingham. Their book, The Knack, is now available in paperback under the title Street Smarts: An All-Purpose Tool Kit for Entrepreneurs.

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Last updated: May 1, 2010

NORM BRODSKY | Columnist

Street Smarts columnist and senior contributing editor Norm Brodsky is a veteran entrepreneur who has founded and expanded six businesses.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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