We are all in business to take care of our customers but of course we also want to turn a profit. Measuring that profitability can be done in a variety of ways but the one we used to depend on was to measure our EBITDA margin. EBITDA is an acronym for Earnings Before Interest, Taxes, Depreciation and Amortization. EBITDA gives an indication of the current operational profitability of the business. The calculations would be as follows:
EBITDA = Net Profit + Interest + Taxes + Depreciation + Amortization
&
EBITDA / Total Revenue = EBITDA Margin
Wikipedia has a great summary for this definition: It is intended to allow a comparison of profitability between different companies, by canceling the effects of interest payments from different forms of financing (by ignoring interest payments), political jurisdictions (by ignoring tax), collections of assets (by ignoring depreciation of assets), and different takeover histories (by ignoring amortization often stemming from goodwill).
EBITDA also happens to be a popular metric when discussing valuation in an acquisition. Many companies use this as a metric to base the actual valuation; for example, Company ABC was acquired for 8 times EBITDA. Meaning that the acquiring company paid 8x the EBITDA Company ABC produced.
When we first started measuring our EBITDA Margin at Compuquip, we were trending in the mid single digits (i.e. 4% - 6% range). That’s when we started to take a hard look at our P&L and trying to drive that number into double digits. The best in class for MSPs had EBITDA margin above 15% and some would be 25%. Our goal was to work our way to 10% and then eventually to 15%.
The important thing was we began the measurement of the metric and by understanding that as we grew; we needed to keep our costs in control. That helped us work our way up to 12% EBITDA over an 18 month period.
This blog is part of our Internal Metrics That Matter For MSPs blog series that you can download here: Download White Paper