What EBITA Multiple?

November 19, 2022

by a searcher in New York, NY, USA

To avoid getting myself into a rabbit hole of analysis paralysis. May someone please explain to me in the simplest way possible,

What EBITA Multiple?
How to calculate this?
What's the benchmark for a good/bad EBITDA Multiple?

Thank you very much!
John Thelusca, PMP

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Reply by a searcher
from University of Virginia in Richmond, VA, USA

1) there’s no specific multiple that fits in any given situation. For small businesses the transactions are often 3x to 5x EBITDA. This will depend on a lot of things but usually the growth rate, business size, and industry most affect the EBITDA multiple. The bigger the business and growth the bigger the multiple of EBITDA. Also the net working capital affects this.
2) EBITDA is calculated as net income+ depreciation + interest + income taxes + amortization + any other addbacks like the owner took a company sponsored vacation each year for $20,000. EBITDA is not the same as seller’s discretionary earnings (SDE). To get to SDE from EBITDA you add whatever salary you think the market warrants to have someone run the business you’re looking at. Never pay a multiple on SDE. Only pay on EBITDA. EBITDA is really an apples to apples metric to asses how a business does before accounting, tax, and financing decisions come in.
3) this is the hardest question and everyone is always trying to figure this out. It’s more judgement than anything but you probably don’t want to pay more than 5x EBITDA for most small businesses unless they have really strong grow rates that you and your investors believe will continue into the future. But still y’all could be wrong. So be careful.

Reply by an intermediary
from Boise State University in 800 W Main St, Boise, ID 83702, USA

Hi John, the acronym EBIT stands for "earnings before interest and taxes". EBITDA means "earnings before interest taxes depreciation and amortization". In other words, take net profit after tax and add back those items. A multiple is one number divided by another. It could be asking price (or sold price) divided by EBITDA. For example if the price was $1,000,000 and the EBITDA was $500,000, the "multiple" would be 2.00 ($1,000,000 divided by $500,###-###-#### Also, please know there is no such thing as a "good/bad EBITDA multiple" because it depends upon the circumstances! Here's a link to another discussion here on Searchfunder about EBITDA multiples (it has been discussed a LOT): https://www.searchfunder.com/post/sde-vs-ebitda-multiples and here is a link to an article I wrote for BizBuySell about this topic recently here:https://www.bizbuysell.com/learning-center/article/cash-flow-sde-ebitda-what-business-buyers-should-use-to-decide-what-to-pay/

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