Valuation for business with huge fluctuation in EBITDA from COVID?

August 14, 2023

by a searcher from Illinois State University in Denver, CO, USA

I'm looking at a business that's got substantial swings in EBITDA from the COVID years. It's clearly valued by the 2022 EBITDA, but the last time EBITDA was remotely close to that was 2018.

EBITDA
2022- $1M
2021- $450K
2020- $377K
2019- $361K
2018- $801k

No doubt this industry was hit hard by COVID, so it seems somewhat unfair to value this based on that time frame, but the margins are tight at around 20%, so this could go south very quickly if EBITDA drops below $600K.

How would you approach this valuation?

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Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

I think you will have to dig in and understand all of the metrics impacting the company and EBITDA. My biggest concern would be the impact in 2019 even more so than###-###-#### Many businesses have normal cycles they go through where revenues or margins move up or down for a variety of reasons. Being sure you understand where the company was at then and where it is today both from a structure and growth perspective are key. Has the business added a bunch of customers? Are those customers sticky? Have they cut costs or improved margins? Can they sustain those margins? What does competition look like.

I do agree you need to look at 2022 and interim 2023 cash flow. I would also look at cash flow from mid 2021 through mid 2022 to see if there was growth and recovery then that matches current operations. Happy to help you dive into some of the numbers from a financing perspective if you need assistance. You can reach me here or directly at redacted Good luck.

Reply by a searcher
from Harvard University in Fort Wayne, IN, USA

This is a great opportunity to use an earnout. If they so strongly believe the deal is worth a multiple of the last (largest) year in the history of the company, make them put their money where their mouth is, e.g. if the business stays strong, you'd happily pay them more over time. But if the EBITDA slips, they don't get the full valuation. They will moan about them carrying the risk of your operating prowess, but you can negotiate the details on that and get their support to help ensure profitability doesn't slip post close.

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