What does an EBITDA multiple calculate?
In a simplified illustration, multiplying EBITDA by an EV/EBITDA multiple produces an enterprise value indication. The calculation only makes sense when the definition and period of earnings match the multiple being used.
CFA Institute’s guide to valuation multiples distinguishes enterprise value multiples from share-price multiples and explains the importance of the underlying financial measure.
HYPOTHETICAL ARITHMETIC ONLY
£200,000 of EBITDA multiplied by 4 gives £800,000. The 4× multiple is chosen solely to demonstrate the arithmetic. It is not a market benchmark, suggested multiple or assessment of your business.
Ask what sits inside the earnings figure
Does the figure relate to the last financial year, a recent twelve-month period or a forecast? Has it been reconciled to the accounts? Were adjustments made, and what evidence supports them?
Normalisation should not mean adding back every cost an owner would prefer to exclude. If a cost is removed, explain why it is not expected to be needed in the relevant ongoing business. Where the owner performs an essential role, replacement responsibilities also deserve attention.
An unexplained adjusted figure can make the final calculation look more precise while making it harder to understand.
Check whether the comparison is relevant
Before relying on an observed transaction or company, examine what is actually known about it. A headline announcement may omit terms or the earnings definition needed for a meaningful comparison.
- Are the business model, scale and growth characteristics relevant?
- Is the financial measure historic or forecast, and is the period comparable?
- Are the transaction terms and valuation definition clear?
- Are there differences that need explicit consideration?
Do not interpret a published range as a promise that every business in that sector falls within it. The scope and evidence have to support the assessment of the specific company.
Do not treat EBITDA as cash available to the owner
EBITDA is not a bank balance or a cash flow forecast. It does not, by itself, describe the cash required for investment, working capital or financing obligations.
When discussing a sale, clarify how an enterprise value indication relates to equity value and transaction terms. The enterprise and equity value example shows a simplified bridge.
Different buyers can also propose different timing and conditions for payment. A valuation calculation alone does not resolve those commercial terms.
Five questions to ask about a multiple-based valuation
- What does the earnings number represent, and can it be reconciled?
- Which adjustments have been made and why?
- What evidence supports the multiple?
- What kind of value does the calculation produce?
- Which further assumptions or adjustments remain?
These questions provide a stronger starting point than asking for a standard multiple. Our sale valuation support can help define a scope around the business and the decision ahead.