Dear Mum,
I trust you’re doing well. As I delve deeper into the leadership role within our family business, I’ve encountered a recurring theme in financial discussions: the prominence of EBITDA as a valuation metric. Financial experts and consultants frequently cite EBITDA as the cornerstone for business appraisal, emphasizing its ability to strip away extraneous factors to reveal the core earnings from our operations.
For instance, consider our recent expansion into the organic food market. The EBITDA figure highlights the operational success of this venture by focusing on the earnings before we account for the hefty depreciation of our new processing equipment. It suggests that our operational decisions are sound, even though the initial capital investments are substantial.
Moreover, in negotiations with potential investors, EBITDA has been a focal point. They argue that it offers a purer comparison with peers, especially since tax environments and asset bases can vary significantly. It’s as if EBITDA has become the universal language of business health in our industry.
Yet, despite its widespread acceptance, I can’t shake off the feeling that EBITDA might be painting an incomplete picture. It’s a conundrum, Mum. On one hand, EBITDA is praised for its operational focus; on the other, I wonder if it fully captures the long-term viability of our business. Your seasoned perspective would be invaluable here. Is EBITDA the beacon it’s touted to be, or does it cast a shadow on other vital financial truths?
Eagerly awaiting your insights.
Warm regards, Jordan
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My Dear Son,
Your letter is a testament to your dedication and thoughtfulness. EBITDA is indeed a prevalent metric, but it’s essential to look beyond it to gauge the true health of our business.
I remember the year we ventured into the premium market. The EBITDA figures were stellar, and I was convinced we were on the right track. However, this metric masked the hefty financial obligations we had incurred. It was a lesson learned the hard way when we teetered on the brink of bankruptcy because our focus on EBITDA blinded us to the mounting interest expenses and the unsustainable debt structure we had built.
Consider the acquisition of the vineyard. The EBITDA for this venture was impressive, as it doesn’t consider the interest on the loan, we took to finance the purchase. However, the net profit tells a different story. After accounting for the interest, taxes, and the depreciation of the vineyard’s assets, the net profit provides a sobering contrast to the EBITDA’s optimism. It’s a stark reminder that these expenses are real and affect our bottom line.
Net profit is the distillation of all our efforts and decisions. It’s the amount we can truly claim as our earnings, which we can then allocate to dividends, reinvestment, or savings. It’s the foundation upon which we build generational wealth. A business that can maintain a robust net profit is one that’s not just surviving but thriving. It’s a business that can withstand economic shifts, invest in innovation, and continue to grow sustainably.
As you forge ahead, remember that strategies boosting net profit will secure our legacy.
Some of the strategies that I learned over time to boost net profit are:
It costs more to acquire a new customer than to keep an existing one. By providing high-quality products and services, excellent customer service, and loyalty rewards, we can increase repeat purchases, referrals, and word-of-mouth marketing.
We need to find the optimal price point that maximizes our profit margin without sacrificing sales volume. We should also consider dynamic pricing, which adjusts prices according to demand, seasonality, and competition. This way, we can capture more value from different segments of customers and avoid leaving money on the table.
Always look for ways to cut unnecessary costs and improve our operational efficiency. We can use technology to automate tasks, streamline processes, and reduce errors. We can also negotiate better deals with our suppliers, outsource non-core functions, and eliminate waste and duplication.
We should also leverage our existing assets and capabilities to generate passive income, such as renting out unused space, equipment, or inventory.
Another important aspect of running a successful business is managing your debt wisely. You should avoid taking on too much debt that could jeopardize your cash flow and credit rating. You should also look for ways to lower your interest rates, extend your repayment terms, or refinance your existing debt. By structuring your debt sustainably, you can ensure that you have enough liquidity and solvency to weather any market fluctuations and invest in future growth.
Finally, you should always build in a margin of safety with regards to your sustainable cash flow and manage your debt financing strategically. You should not spend more than you earn, but rather save some money for rainy days or unexpected expenses. You should also use debt financing only when it makes sense for your business, such as when you have a clear plan to generate returns that exceed the cost of borrowing.
Son, it’s not just about surviving the next quarter but about thriving for decades to come. Cultivate the vineyard of our business with care, and it will yield fruit for generations.
With pride and love, Mum
