Determining a Weighted EBITDA Average

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by a searcher from University of Cambridge
in Dallas, TX, USA

1yr ago

Determining a Weighted EBITDA Average

Given that we are halfway through the year, how would you weight 2024 YTD EBITDA if you were trying to determine a weighted EBITDA average? I have been annualizing the 2024 YTD EBITDA figures provided by the Seller and assigning them a weight of 2 on a scale of 1-3, as in the following example. I would really appreciate hearing how others are approaching this.

2021 EBITDA: $1,250,000 (Weight = 1)
2022 EBITDA: $1,500,000 (Weight = 2)
2023 EBITDA: $1,750,000 (Weight =3)
2024 YTD EBITDA: $2,000,000 (Weight = 2)

Avg. EBITDA = $1,687,500

1 Like

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reply by an intermediary 1yr ago
from Iowa State University in Kansas City, MO, USA

Personally, I appreciate when sellers commit to specific targets, such as revenue or cash flow. One strategy I often consider is re-evaluating the offer if these targets are not met. We are usually very upfront about this and inform the seller early on that our valuation of the company is based on achieving a specific financial target within the current year. This is something to keep in mind if you haven't already established such expectations. Typically, I apply a weighted average to the projected numbers, giving around 30% weight to the current year's figures. However, this ultimately depends on what you are comfortable with. Thoughts??

reply by a searcher 1yr ago
from University of Cambridge in Dallas, TX, USA

Thanks Reece! I think this is a good model for deals in which sellers are open to the idea of meeting specific thresholds to realize the full purchase price. This hasn't been the case for. most of the deals I've been looking at. But the 30% you apply to the current year's figures is a good guide.