July 2014 Archives

My mother lived with me in her last years. We enjoyed her sense of humor.

Here's part of that - that made me realize how useless the phrase, "Hi How are you?" is.

The house phone rang. Esther answered.

The man says, "Hi, Mrs. Friedman, this is Dan from XXX, How are you?"

My mother says - without missing a beat:

"I'm so glad you called, I have a bad case of diarrhea, a terrible migraine, been vomiting all day, my pacemaker is running slower than normal, and I have a bad rash.... How are you?

He said, 'well, compared to you - a hell of a lot better" and hung up.

Point being; "Hi how are you" is semi useless" Especially to those we don't even know. I've seen folks pass in the halls, in a mall, in an office, everywhere... one says, "Hi how are you?" The other says "fine, how are you"?... no one stops...they're still walking - and nothing was accomplished.

I've removed "Hi How are you" from my vocabulary. It's been replaced with any one of these phrases and I share them with you:

  • Good to see you.
  • Hi, you're looking well.
  • Thanks for being here
  • You look super.
  • Nice to hear your voice (On phone)
  • I'm glad you called. (On phone)
  • You're sounding great. (On phone)

There are more.. I just got the ball rolling......anything, but "Hi, how are you?"

I've changed my mind. It's not semi useless. Just useless.

Watch what happens when you change your tune. People start really listening to you.

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Nancy Friedman is a featured Keynote speaker and subject matter expert on Customer Service and Communications skills, at franchise, association & corporate meetings. She has appeared on OPRAH, Today Show, CNN, FOX News, Good Morning America, CBS This Morning & many others. Nancy is the author of 8 books on sales and customer service and is the spokesperson in the popular DVD customer service training programs. For a demo of Nancy call 314 291 1012 or visit - www.nancyfriedman.com.

In the franchise finance world, the most discussed number is the EBITDA--EBBADABADOO as some call it. EBITDA is earnings before interest, taxes, depreciation and amortization. It is really a sub-total to the income statement. It is earnings without any charges for cost of funds, taxes or capital spending.

EBITDA's use began popularized as a credit metric, used in the 1980s M&A and credit analysis world--to test for adequacy of debt coverage. EBITDA is often the common denominator to track and report company buyout values:  the acquisition enterprise value to EBITDA ratio is a very commonly reported metric. So much so that that's where the focus goes. And its use as a simple business valuation tool: the company is worth some multiple of EBITDA; the higher the multiple, the higher the price, and vice versa.

In the franchising space, where franchisors might report a simple EBITDA payback for an investment, or report EBITDA value in their franchise disclosure document item 19 section. The special problem there is this EBITDA is stated in terms of the restaurant level profit only--before overhead. Really, the problem is this: EBITDA doesn't show the whole picture. It is a sub-total. It doesn't show full costing.

EBITDA alone as the metric misses at least eight costs and expenses, that are vital to know, calculate and consider in operating and valuing the business as a cash and value producer.  Using a business segment such as a store, restaurant or hotel as an example, here are the eight required reductions to EBITDA that must be subtracted, listed in order of magnitude of the cash outlay, to really get to operating economic profit.

  1. Interest expense:  the cost of the debt must be calculated. Interest is amount borrowed times the interest rate times the number of years. One can have rising EBITDA but still go broke.
  2. Principal repayment:  the business cash flow itself should contribute to the ability to pay back the principal debt. That often is in a 5 or 7 year maturity note and is another very large cost that must be considered.
  3. Future year's major renovation/remodeling: once the storefront is built, it has to be renewed and refreshed in a regular cycle, often every 5-10 years, via capital expenditures (CAPEX). That often is 10-30% of the total initial investment, or more, over time.
  4. Taxes, both state and federal: Financial analysis often is done on a pre-tax basis as there are so many complicating factors. But the reality is the marginal tax rate is about 40%.
  5. New technology and business mandates: aside from the existing storefront that must be maintained, new technology, and new business innovation CAPEX must be funded to remain competitive. Example: new POS systems for restaurants, new technology for hotels.
  6. Overhead: if the EBITDA value is stated in terms of a business sub-component, like a store, or restaurant or hotel, some level of overhead contribution must be covered by the EBITDA actually generated. Generally, there are no cash registers in the back office, and it is a cost center.
  7. Maintenance CAPEX: for customer facing businesses (retailers, restaurants, hotels, especially) some renovation of the customer and storefronts must occur every year and does not appear in the EBITDA calculations.  New carpets, broken windows, you get the idea. In the restaurant space, a good number might be 2% of sales.
  8. And finally, new expansion must be covered by the EBITDA generation, to some level. New store development is often a requirement in franchise agreements, and new market development necessary. While new funds can be borrowed or inserted, the existing business must generate some new money for the expansion.

You might say...these other costs and expenses are common sense, they should show up in the detailed cash flow models that should be constructed. Or they can be pro-rata allocated. But how times does this really happen? The EBITDA metric becomes like the book title....or the bumper sticker that gets placed on the car. You really do have to read further or look under the hood. And the saying is true...whatever you think you see in EBITDA...you need more.

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This page is an archive of entries from July 2014 listed from newest to oldest.

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