How to value a business with sudden increase in EBITDA?

by a searcher from University of Cincinnati - Carl H. Lindner College of Business

1 year ago

I have come across quite a few business where TTM and/or base year revenue and/or EBITDA is significantly higher than it was in the previous years. For example: one business had EBITDA around 700-800k from 2017 to 2020 and then it was 1.2 million+ in 2021 and TTM. 

Could you please provide insights on: 

1. How to forecast realistic post-acquisition EBITDA for such business and how to value this businesses? 

2. Is it even worth pursuing these deals? If yes, how to structure the deal to minimize the risks: forgivable seller note or something else?
3. What should I investigate to make sure that nothing fishy was done to boost the revenue and/or EBITDA numbers

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lender from Baylor University - Hankamer School of Business

Two common approaches: (1) Calc exit multiple based on the average EBITDA for the trailing 3 years. This is a simple way to help "normalize" EBITDA. Or, (2) calc the multiple like normal (e.g. TTM EBITDA) but require the seller to seller finance a larger piece of the purchase price. It's like saying to the seller "if you really believe the sudden increase in EBITDA is the new normal (and not just an anomaly ), prove it with a seller note." [obviously don't use those words haha]. Hope that helps!

1 year ago | like reply | 1 like

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