Weighted EBITDA average calculation

If the numbers were reversed (.e. declining from $1.7 to $1), will you be willing to pay based on avaerage? I am guessing, No. Similarly, the seller will be reluctuant to average last 3 years when things are going up. The answer lies in understaning the growth and then your assesment of what it will be under you.

What you're trying to do is use historical earnings as the best indicator of future earnings of course, it's the future cash flow discounted for risk that is the fundamental valuation formula. Firstly, there is no set rule, it's subjective. One answer is to weigh the most recent year by 50% and the 2-3 previous years by 25%/16%—but it remains subjective. I do lots of paid business valuations and in this case, I would quiz the owners about future revenue and EBITDA projections. If they are a form of recurring earnings then that adds credence to those projections, if much of it is in multi-year contracts then that adds further credence. If there is less volatility and more consistency that's more credence still. The more creditability the more likely to choose the last year of earnings, and the less credibility I average out the last 3-5 years.

You may want also want to forecast the next few years cash flow and use that as the basis of your analysis—if you feel you can make sensible projections. Not a tidy answer but this is a "messy marketplace" to quote Brent Beshore, or a "bizarre bazaar" to quote Robert Slee. I think there are a lot of opinions that masquerade as facts in our industry—this ain't theoretical mathematics with correct answers.