EBITDA Multiples

Selling a business is difficult on an emotional and financial level. Not only do business owners have to find a good match in terms of meeting a buyer who will continue their legacy, but they must also use appropriate metrics to value their company. There are many factors to consider including competitive advantages, growth opportunities, and historical financial performance.

Earnings before Interest, Taxes, Depreciation, and Amortization (EBITDA) is a great starting point to understand how to measure financial performance. It is calculated by adding non-cash expenses back to the operating income and is used as a proxy for evaluating a business’ earning potential. Essentially, EBITDA creates a standard measure of performance, making it possible to compare similar companies across industries or in different tax brackets.

Typically companies with EBITDA of $3M and under are considered to be in a 3-5x multiple range. For example, a $1M EBITDA company would be valued at $3M - $5M dependent upon a number of other factors. Some examples of common factors are key person risk, cyclicality, and customer concentration, among others. The higher the EBITDA gets the higher the multiple range gets, so a $5M EBITDA company would be more likely to sell in the 5-7x multiple range.

Business owners should work to boost their overall financial performance, create consistent earnings, prepare high-quality financial statements. Working with an accountant and your financial team now can help your value when you are ready to sell down the road. If businesses are typically value based on EBITDA, it is important to understand the metric and how you can prepare to increase your value by using it.

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