EBITDA Multiple

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What It Means

EBITDA multiples are one of the most commonly used methods of Business Valuation for Middle Market businesses. The use of EBITDA provides a means of valuing a company that excludes the effects of capital structure, taxes, and capitalization strategies. The multiplier used in the calculation is somewhat subjective, depending on the underlying characteristics of the business being valued, and usually falls within a narrow range based on market trends and comparable company Acquisition multiples.

The EBITDA Multiple can be calculated simply by dividing the Enterprise Value of the company by its EBITDA.

Why It’s Important

There are only two factors that affect the Enterprise Value of a company through an EBITDA Multiple analysis, the value of EBITDA and the multiple factor applied to it. Fortunately for Sellers, they have some level of control over both of these factors. EBITDA can be directly controlled through the management of expenses. Multiple values can also be influenced, although less directly, by implementing changes in the business that reduce risk and make the company more valuable in the eyes of Buyers.

EBITDA multiples are more often used to come up with a starting point and range for a valuation negotiation. Sometimes the purchase price of a company becomes tied to a specific multiple of EBITDA during the negotiation. When that happens, both Buyer and Seller agree that the final purchase price at closing will be adjusted up or down based on the up to date value of EBITDA at that point in time, which can be weeks or months down the road. At the end of the day, the Enterprise Value of any company is set by what a Buyer is willing to pay for it.

Related Terms

• Business Valuation

• Buyout

• Discounted Cash Flow Analysis (“DCF”)

• Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”)

• Enterprise Value (“EV”)

• Indication of Interest (“IOI”)

• Letter of Intent (“LOI”)

• Multiple

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