EBITDA vs Commission Revenues – Which one should receive more attention and higher Multiples
Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) determines how financially healthy and sustainable your brokerage operations are by measuring the profitability of the brokerage from its core operations without factoring in depreciation, amortization, taxes, and interest on existing loans.
Multiples – the historical average price of a brokerage relative to its peers.
While we have seen many deals based upon multiples times commissions revenue, the multiple of EBITDA is a more accurate measurement to use to determine a brokerage’s valuation because it factors in brokerage debt. It is also a good indicator of what level of debt is acceptable to take on. It should not come as a surprise that the interest cost of a loan has a strong impact on the cash flow from operations. This indicates how well a brokerage can service its debt and if it has the capacity to take on additional loans to expand its business operations. This is one of the bigger reasons we have seen brokers turn to insurers for financing means. No harm against this strategy until the insurer has extended so much to the broker that the broker ultimately loses control and autonomy of their operations, unless that was already lost from the execution of the initial deal.
EBITDA Margin utilizes the same EBITDA measure as a percentage of a brokerage’s total revenue. A broker can use the EBITDA Margin to track operating profitability as a percentage of its total profitability, which is a clear indicator of a brokerage’s financial health. So what is a healthy EBITDA Margin? An EBITDA Margin of 20% or greater is a good indicator of a financially healthy brokerage, excluding Contingent Profit Commissions (CPCs), as these are not always stable or guaranteed.
Stable CPCs is a good discussion to have in negotiating multiples against EBITDA versus commission revenues, however, CPCs are never a guaranteed revenue source, ironically making EBITDA Margin an even more important metric to pay attention to.
If you are in need of advice or assistance in securing capital and/or exploring viable and sustainable options for various opportunities including mergers and acquisitions or succession planning, contact us at BrokerFinancialSolutions.com.