EBITDA

EBITDA

By Brian Madigan

Peculiar initials, but what do they mean? The definition of EBITDA is earnings before interest, taxes, depreciation and amortization.It is said to be a measure of the profitability of a business.

Frequently, a business will be prepared for sale. The business will be removed from the real estate it occupies. Separate financial statements will be prepared for each. The vendor’s objective is to make both aspects look good on paper. In many cases, there will be two different buyers, one for the business and another for the real estate.There is a real opportunity here for some creative accounting.

The real estate can probably stand on its own. Ultimately, the real estate should fetch a market price coincident with that otherwise found in the marketplace.The business is a little different. Most businesses are sold on the basis of a multiplier calculated on net profits. Small businesses will trade from one-half of one year’s earnings plus inventory up to three times in some cases. Medium sized companies will often trade in the range of three to seven times earnings (with or without inventory) and large companies will trade for seven to fourteen times earnings (inventory included).

This is the usual range for profitable companies listed on a major stock exchange. Obviously, the technology companies are an exception.This is where EBITDA comes in. Stockbrokers and particularly stock promoters wished to have their companies appear in a very good light. In fact, it can make capital intensive marginally profitable companies look quite good on paper. Market analysts over the past few years have criticized this approach pointing out that it does not truly represent real operating cash flow.

EBITDA omits to consider variations in accounting methods, cash required for working capital, debt payments and other fixed expenses, as well as capital expenditures. These issues are critical to every operating business, and it can be foolhardy to base an evaluation of a business on the earnings calculated in this manner. EBITDA has its place in a proper analysis, but don’t let the vendor establish a sale price using this method alone.

The Real Estate and Business Brokers Act governs the real estate profession in both matters: the property and the business. But it doesn’t say anything about how to undertake the math or which formulas to use. So, be careful and fully understand the accounting methods used to justify the sale price when you are considering purchasing an operating business.

Brian Madigan LL.B., Realtor is an author and commentator on real estate matters,

Coldwell Banker Innovators Realty

http://www.ontariorealestatesource.com/

Real Estate Council of Ontario ~ Discipline Role

By Brian Madigan

The Real Estate Council of Ontario (RECO) is charged with the administration of the Real Estate and Business Brokers Act (REBBA 2002). It supervises everyone in Ontario who trades in real estate as either a broker or as a sales representative.

There are some people who are exempt from the provisions of the Act, since their conduct is regulated under other legislation. An example would be solicitors who are governed by the Law Society of Upper Canada.So, when it comes to real estate trading, there are certain rules. These rules are set out in the Act and in the regulations published pursuant to the Act. The recent amendment to the Real Estate and Business Brokers Act in 2002 (not proclaimed in force until 2006) was the inclusion of a regulation that dealt specifically with ethics, namely the Code of Ethics.

The passage of this piece of legislation has added and increased the degree of professionalism within the entire real estate industry.Over the next few weeks we will review some of the discipline decisions of RECO. The decisions are published on the RECO website. I will provide a link to the website for the curious. However, in reviewing the cases, I will not mention any names, nor will I offer alternative explanations that might have been reviewed and rejected by the Discipline Panel. My objective is simply to review the decision made on the basis of the facts accepted as evidence with a view to offering some guidance in terms of future decisions that might be made by RECO.

So, if your case came before RECO, you will be pleased that I don’t mention your name; on the other hand, you’ll be disappointed that I don’t offer your version of the facts, if they were not accepted by the Discipline Panel. Generally, if your case is under appeal, I won’t be making mention of that fact until such time as a later decision were to either uphold or overturn the existing decision.

My sole perspective is to interpret RECO decisions and offer guidance to the real estate industry and the public.The Real Estate Council of Ontario maintains a website (RECO Website) at http://www.reco.on.ca/ which is available to the public. If you are a member of the public or a registrant and you wish to complain (or inquire) about the conduct of someone whose conduct is regulated by RECO, that is either brokers or sales representatives, then you may do so through this website, or by contacting RECO by telephone or in writing.

When you arrive at the RECO website you will find a button for “Complaints & Enforcement”, which if you click on it will produce a list of several items including:

• Registrar’s Proposals to revoke, refuse or suspend registrations

• Convictions

• Charges

• Discipline and Appeals decisions

These are the areas in which you can assess the performance of RECO in its role of protecting the public and monitoring the activities of brokers and sales representatives. The only category which sets out the reasons for the decisions is the Discipline and Appeals section. The others simply set out the actual result, without giving any real details. So, there’s not that much to be gained from reading them.

Accordingly, we’ll start with the Discipline and Appeals cases. It is important to note that under the Act, the first Discipline panel to hear the case will hold a hearing with all the various witnesses. Should the case be appealed, then it is heard by the Appeals Panel. This time, it is a paper review only. There are no witnesses. This Panel accepts the findings of fact made by the Discipline Panel and hears the arguments of the parties once again and makes a new decision.

Brian Madigan LL.B., Realtor is an author and commentator on real estate matters,

Coldwell Banker Innovators Realty

905-796-8888

http://www.ontariorealestatesource.com/