Why my obsession on EBITDA!
I have a nickname in the office—it’s “Ebitadorf” and I am awkwardly proud of it. I’m far from an accounting nerd, but at the same time, tremendously focused on the bottom line. I realize that the perception of “entrepreneurs” and “founders” of growth companies are closer to what people said of Steve Jobs and others as having a “reality distortion” field. This is, according to the books “a tendency to distort co-worker’s sense of proportion and scales of difficulties to make them believe whatever impossible task he or she had at hand was possible”. I understand this is typical way of looking at some leaders of growing companies--that they are not always grounded in reality.
But I have never been caught up in the “irrational exuberance” of markets or other forces that kept me from focusing on the bottom line. While I have been in the entertainment/hospitality industry (code word for not the most financially lucrative of the industries), I have always approached decision making looking at everything in Excel, not Word or Powerpoint. Well, before spreadsheets actually, simply doing the math and making sure that the basic revenues, less expenses, at least pretended to show a profit (albeit, in m 50-plus years of trying to make money, having large bank accounts is not what I’m known for). But being in the black, must be the underline thesis for profit ventures.
EBITDA stands for Earnings before Interest, Depreciation and Amortization. I first heard this being thrown around sometime during the dot.com build-up in the mid 1990’s with my first real business, the Knitting Factory and seeking investors for the first time. “A multiple of EBITDA” was the way to get to valuation on the business. While at first, I never understood why they didn’t call it net profit, I eventually understood that the fake expenses for tax purposes of depreciation and amortization didn’t reduce real cash and that “interest” could be rationalized as not a real expense by investors. In some cases, investment bankers have bucket loads of other ways to adjust EBITDA to arrive at a number to come up with a valuation. Nevertheless, this is the vernacular in the world of raising money, and thus, we certainly want to play in this sandbox.
On Shark Tank, Mr. Wonderful or Marc Cuban will analyze a “valuation” based on sales, on margins, and a quick calculation of market value, risk, and other factors coming up with their “multiple” to arrive at valuation. But outside of the made for TV negotiations, the rest of the world examines EBITDA which is a reasonable standard to evaluate cash flow and profitability. So, I have worked hard to integrate this into our business conversations with all our managers and operators.
In our particular case, as a business scaling with multiple locations, I try and look at our company as having a “Store-level Ebitda” and a “net after corporate” Ebitda. This allows us to take all the operating locations as a stand-alone operation before subtracting some allocation of corporate costs for running the entire enterprise. But in the end, it is the consolidated bottom line that matters. I try and explain that we are really a large and spread-out lemonade stand--we sell a couple million glasses a year, then need to deduct all our costs (every single one) and what is left is our bottom line. Fairly elementary. No bells and whistles.
But getting all our general managers, all our national team members, and especially the executive team to all row in the same direction with EBITDA as constant reminder. It’s not our NorthStar, not our mission, not our Mantra, and not our non-negotiable core values or anything related to our aspirational goals. This is a more basic part of our business lens to make sure we use our common sense to remain solvent, to make sure all of our activities lead to positive financial results, and keep the train running on the tracks. With this mindset of EBITDA, we can experiment, grow, learn from mistakes, bring joy to our customers, bring happiness to our team, and all the other more important parts of doing business in this dynamic world.