EBITDA Multiples Valuation Method

The most widely used valuation approach for established businesses with positive earnings

What is EBITDA?

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It represents a company's operating performance by focusing on earnings from core business operations.

Operating Focus

Excludes financing and tax decisions to focus on operational performance

Cash Flow Proxy

Provides approximation of cash available to service debt and distribute to owners

Comparability

Enables comparison across companies with different capital structures

EBITDA Calculation

Net Income$XXX,XXX

+ Interest Expense$XX,XXX

+ Tax Expense$XX,XXX

+ Depreciation$XX,XXX

+ Amortization$X,XXX

= EBITDA$XXX,XXX

How EBITDA Multiples Work

Calculate EBITDA

Determine the company's normalized EBITDA by adjusting for one-time items, owner benefits, and non-recurring expenses.

Find Market Multiple

Research comparable company transactions and trading multiples to determine appropriate EBITDA multiple for the industry and business size.

Calculate Value

Multiply normalized EBITDA by the selected multiple to determine enterprise value, then adjust for net debt to arrive at equity value.

Typical EBITDA Multiples by Industry

Higher Multiple Industries

Typically 5x - 12x EBITDA

Software/SaaS8x - 12x

Technology Services6x - 10x

Healthcare IT7x - 11x

Specialized Manufacturing5x - 8x

Moderate Multiple Industries

Typically 3x - 6x EBITDA

General Manufacturing4x - 7x

Professional Services3x - 6x

Healthcare Services4x - 7x

Distribution3x - 5x

Important Considerations

These ranges are general guidelines. Actual multiples vary significantly based on company size, growth rate, profitability, market position, and current market conditions. Smaller companies typically receive lower multiples than larger companies in the same industry.

When to Use EBITDA Multiples

Best Used For

• Established businesses with consistent positive EBITDA
• Companies with annual EBITDA of $1M+
• Capital-intensive businesses (manufacturing, equipment)
• Companies with significant depreciation/amortization
• Businesses seeking acquisition or investment
• Industries with established multiple benchmarks

Limitations

• Not suitable for businesses with negative or minimal EBITDA
• Doesn't account for capital expenditure requirements
• May not reflect working capital needs
• Less relevant for asset-light service businesses
• Requires quality comparable transaction data
• Market multiples can be volatile

Common EBITDA Adjustments

Add Back (Increase EBITDA)

• One-time professional fees
• Excessive owner compensation
• Personal expenses through business
• Non-recurring legal settlements
• Unusual bad debt expenses
• Above-market rent to related parties

Subtract (Decrease EBITDA)

• Below-market owner compensation
• Deferred maintenance expenses
• Below-market facility rent
• One-time favorable settlements
• Unsustainable cost reductions
• Missing key employee costs

Quality of Earnings

• Revenue recognition policies
• Sustainability of margins
• Customer concentration risk
• Seasonal adjustments
• Growth trend analysis
• Cyclical business considerations

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