October 24, 2017                     Next Issue: Tuesday, November 7
In this issue :
EBItDA: Too Popular by Half! 
and seven news article commentaries
relevant to transition and valuation.

EBITDA: Too Popular by Half!
Ian R. Campbell, Business Transition Counsel Inc.
In This Issue
EBITDA is an acronym for earnings before interest, taxes, depreciation and amortization. Multiplying EBITDA as a way to value businesses and ownership interests in businesses:

1.    is said to have first been adopted in the United States in the 1980s.
2.    gained popularity in Canada in the early 1990's.
3.    currently seems to be gaining ever more traction around the world with investment bankers, stock analysts, business valuation advisors, financial advisors and business owners.  

The phrase too clever by half refers to someone who is too clever for their own good. By inference, too popular by half in reference to EBITDA is taken here to mean too popular in the context of its usage as a business value metric.

This commentary:

1.    explains the multiple of EBITDA business valuation methodology.
2.    discusses reasons it ought not to be generally adopted as a primary business valuation methodology - irrespective of whether the valuation is required for open market sale or any other purpose.
3.    quotes others who have big reputations in the investment community as to their views on the validity of the EBITDA methodology.


Many business owners and advisors seem enchanted with EBITDA. They claim various professional and other sources as credibility for adopting multiples of EBITDA as a primary business valuation methodology, and for the EBITDA multiples they adopt. This where ..... 
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News Headlines, Article Links, Curation
 Ian R. Campbell, Business Transition Counsel Inc.

In the past two weeks the following articles relevant to Business Transition and Valuation have been selected from a population of approximately 5,000 articles.

Selected articles and curation comments are organized under the following headings:
Business Transition News, Business Valuation News, Technology News, Economic News, and Financial Markets News.
Please forward to a friend or colleague!

Business Transition News

U.S. warns public about attacks on energy, industrial firms. Reading time 3 minutes.   Fox Business, October 21, 2017.

Comment: This article reports that on October 20 the U.S. Department of Homeland Security and the FBI warned that since May "sophisticated hackers are targeting energy and industrial firms" including government entities and  "nuclear, energy, aviation, water and critical manufacturing industries".

Hackers are said to use "malicious emails and tainted websites to obtain credentials to access" targeted computer networks.

The point here is that if you are a business owner or an owner in a advisory practice your business could be a hacker target. This where mounds of confidential information almost certainly reside in your business's computers and computer networks.

If your business is not working hard on cyber security it ought to be.
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Emotional Intelligence: A Hidden Key to Career and Workplace Success. Reading time 2 minutes, thinking time longer. Visual Capitalist, October 14, 2017.

Comment: I have previously written about Emotional Intelligence (EI) and its importance in business transition and management. For example see Family Business Transition Planning: Intellectual versus emotional intelligence.

Emotional intelligence can be defined as the capacity to be aware of, control, and express one's emotions - and to deal with interpersonal relationships judiciously and empathetically.

This infographic - aimed at career and workplace success - suggests:

1.    there are five components to EQ, being (1) self-awareness, (2) self-regulation, (3) motivation, (4) empathy, and (5) social skill.
2.    90% of top performers have high EQ.
3.    EQ explains 58% of a leader's job performance.
4.    Selling luxury goods to High Net Worth Individuals (HNWI) requires high EQ.

The fourth item is highly relevant to business transition. Business owners comprise a portion, and likely a significant portion of HNWI. Hence if there is accuracy to this statistic it is further confirmation that both business owners and their advisors need to focus on their respective EQs as being a particularly important business transition strategizing and execution success metric.  
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Nobody Will Escape the Coming Pension Storm. Reading time 4 minutes, thinking time longer.  The Market Oracle, September 27, 2017.

Comment: Unfunded pension liabilities are almost certain to come home to roost as a large problem that will affect underfunded governments, businesses, and societies. This article is one every business owner and advisor ought to read and think about.

From 10,000 feet it seems virtually certain that as the macro-economic can continues to be kicked down the road both public and privately-owned businesses will be looked to for incremental government funding at all government levels.
Business Valuation News

No business valuation news articles are included in this issue of the Business Transition and Valuation Review.   
Technology News
Who Will Be Smart Enough for AI? Reading time 4 minutes, thinking time longer. Forbes, July 31, 2017.

Comment:  Recommended reading by a U.S. business transition firm, this Forbes article ends with the statement "We are at a critical juncture now, one where the countries and societies that best adopt AI (artificial intelligence) culturally and economically may be best poised to dominate the next phase of global economic development."

I suggest the article is a useful "business owner and their advisors" read. However, for me the Forbes statement is too general. I believe that artificial intelligence as it evolves will:

1.    favor larger companies over smaller ones. This where business consolidation - and hence a "larger company environment" - is ongoing in most if not all industries.
2.    many smaller (read family owned) companies for many reasons, not the least of which will related to ongoing technological advances including - but not limited to - AI, are likely to become less competitive. This to the point where the going concern viability of some of those companies will be challenged.

Hence I believe that technology advances, including those related to artificial intelligence, need to be "top of mind" for business owners and their advisors who do "not have time to waste" in their strategic and business planning endeavors.

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3D Printing is Finally Changing the Manufacturing Landscape. Reading time 3 minutes, thinking time longer. Visual Capitalist, September 27, 2017.

Comment:  3D Printing is Finally Changing the Manufacturing Landscape. Reading time 3 minutes, thinking time longer. Visual Capitalist, September 27, 2017.

Comment: A quick read, this article in infographic format and accompanying narrative provides a quick overview of 3D printer advances and prospective applications in the contexts of:

1.    global shipments of 3D printers and expected exponential growth in units in the next three years.
2.    the ongoing development and integration of 3D printing in eight industry sectors.
3.    application percentages for 3D printing for eight distinct "application categories".
4.    current and expected future potential for 3D applications in thirteen industries.  
Economic News 
How Stable Is the Global Financial System? Reading time 6 minutes. Project Syndicate, September 29, 2017.

Comment: Business owners and their advisors interested in reading a good summary of the risks and potential volatility associated with our current global financial system ought to read this article. While it does not lend itself to short summarization, here is a brief overview of what it says:

1.    a global financial system is prone to crisis - attributed Paul Volcker, former U.S. Federal Reserve Chairman.
2.    crises can take a long time to develop but once they erupt they tend to spread rapidly, widely, violently, and (seeming ) indiscriminately as overall financial conditions quickly flip from feast to famine - and there are almost certainly unknowns that could trigger a new crisis - attributed to Mohamed El-Erian, Allianz chief economic advisor.
3.    given the systematic risks that remain today in the current global financial environment the danger of another financial crisis cannot be ruled out - attributed to Stefan Gerlach, former deputy governor of the Central Bank of Ireland.
4.    a serious weakness in the global financial system is that the trillion-dollar overnight repo market in housing mortgages has not been addressed - attributed to Mark Roe, Harvard Business School.
5.    the rise of financial technology threatens to disrupt already-challenged business models, and the current benchmark U.S. Federal Reserve interest rate of 1.0% to 1.5% does not give the Fed enough room to maneuver effectively in the event of a recession - attributed to Nouriel Roubini, New York University and known as Dr. Doom for his early prediction of the 2008 financial crisis.
6.    Basel III's risk-based capital requirements (adopted by the world's 24 largest economies) may not be high enough - attributed to Robert Shiller, Yale professor and Nobel laureate economist.
7.    there is mounting pressure by the Trump administration to reverse key post-2008 financial regulation reforms - attributed to Ngaire Woods, Oxford University.
8.    Sooner or later the age-old pattern of hubris, vulnerability and crisis will re-emerge, and another canary will die - Benjamin Cohen, University of California and author of the referenced article.

No individual business owner or advisor can influence world and country-specific economies in any significant way. That does not mean they should not pay attention to information included in articles such as the one referenced in this commentary. What individuals can do is plan in uncertain times for the worst as best they can - while at the same time keeping their respective glasses at least half-full.  
Financial Markets News
Spain-Catalonia relief edges world stocks to fresh high. Reading time 3 minutes, thinking time longer. Reuters, October 3, 2017.

Comment: World equity markets continued their upward trend on October 10, with many indexes hitting new highs. As but one "world equity markets" example, on April 12, 2017 the DJIA closed at 20,592. On October 10 it closed at 22,830, a six months gain of almost 11%.

In its title the referenced article attributes the October 10 index increases to "Catalonia stopping short of declaring immediate independence from Madrid." The article itself speaks to additonal issues as well.

Catalonia's independence referendum, whether "legal or not", overwhelming was a vote for independence. The vote took place on Sunday, October 1.

The DJIA closed on Friday, September 29 at 22,371, on Monday, October 2 at 22,556 (up 185 from the previous close), on Friday, October 6 at 22,751 (up a further 195 from Monday's close), and on October 10 at 22,830, a further two trading-day gain of 59.

One might think that if "Catalonia stopping short of declaring immediate independence from Madrid" was an important reason the DJIA increased on October 10 that a decrease might have occurred after the Catalonia referendum vote was announced. That didn't happen.

What I think to be the real question, where on most days "experts" express diverse opinions is: Are world equity markets in an ever-inflating bubble, or does real "value" underlie and appropriately support them?  
Newsletter Contributors
Ian R. Campbell is the principal contributor to this Newsletter. He has given business valuation and transition advice to both public and private company owners for over 40 years. Other contributors are experts in business transition or specific disciplines relevant to business transition and valuation. They take part in Q&A sessions posted on
Newsletter content ('Content') does not constitute individualized business transition, valuation, economic or investment advice. The ideas, views and opinions expressed in the Content are solely those of the authors/contributors. Provided 'as is', Content may change without prior notice, may be incomplete, inexact, incorrect or jurisdictionally specific. It is used at the reader's own risk.