How Many Times EBITDA is a Business Worth – (EBITDA Multiples Guide)

FAQ

What is the 'rule of thumb' for EBITDA Valuation

While business valuation is part art and part science, these are some reasonable rules of thumb for EBITDA valuation that we’ll elaborate on in this article.

  • Companies under $250K in EBITDA = 1.5 – 2.5 X EBITDA
  • Companies $250k – $750k in EBITDA = 2 – 3.5 X EBITDA
  • Companies $750k – $1.5M in EBITDA = 3 – 5.5 X EBITDA*
  • Companies $1.5M – $5M in EBITDA = 4 – 9 X EBITDA*

 

*= is eligible for Raincatcher’s auction process and will likely get multiple bids.

Aside from having a more desirable business in a more desirable industry (we elaborate further on this below), the other way to sell for a higher multiple is by running a more competitive process to get more bids on your business.

Companies over $500k in EBITDA may be eligible to work with Raincatcher and our M&A auction process to do just that.

How EBITDA Determines a Business' Value (or does it)

At Raincatcher, we receive somewhere in the neighborhood of 300 inquiries from business owners a month asking how much their company is worth.

That question often-times comes in the format of “I do X amount of EBITDA per year, how much is my company worth?”

While these business owners have the right idea in that 95% of companies are valued on a multiple of their EBITDA. However, the valuation process is much more nuanced than just us assigning a multiple to a company’s adjusted EBITDA.

The valuation process is part art and part science and it is ultimately determined by what buyers are willing to pay, not by what an M&A advisor or business broker tells you it is worth. Putting your business through a competitive auction process with stage gates (IOI and LOI deadlines) is how valuation is maximized.

No blog will be able to help you arrive at an accurate valuation for your company, not even this one. However, we will be able to provide guidance from you to help you get within ~20% of what your business is worth.

If you are looking to sell and are looking for professional guidance on what your buisness is worth, feel free to reach out to us to request a consultation or complete our business valuation calculator to give us a background on your company.

How Much is Your Business Worth Based on EBITDA?

As mentioned above, this varies greatly by industry, size of company, owner reliance, etc. but these are the guidelines for how much your business is worth based on its EBITDA multiple.

  • Companies under $250K in EBITDA = 1.5 – 2.5 X EBITDA
  • Companies $250k – $750k in EBITDA = 2 – 3.5 X EBITDA
  • Companies $750k – $1.5M in EBITDA = 3 – 5.5 X EBITDA*
  • Companies $1.5M – $5M in EBITDA = 4 – 9 X EBITDA*

 

*= is eligible for Raincatcher’s auction process and will likely get multiple bids.

Why are EBITDA Multiples Used as Opposed to Revenue Multiples

The graph below shows the hypothetical growth of a business in it’s middle years of life. If it were sold in the early years while it was reinvesting most of it’s discretionary earnings back into the business (growth capex) for marketing and R&D, it would be sold on a revenue multiple.

Once the business reaches it’s more mature state and is able to reap the financial rewards of the early investments it made into marketing, personnel, and R&D, etc. then it should be sold on a multiple of it’s adjusted EBITDA.

It is recommended not to sell the business until it has stable, predictable free cash flows. Selling in the early innings while the business is still owner reliant and on a steep upwards growth is far more difficult to get multiple interested buyers.

Adjusted EBITDA Crash Course

EBITDA is Earnings before Interest, Taxes, Depreciation and Amortization. This metric is common in the private markets as it is representative of how much cash will be available to a new owner.

Taxes, depreciation, and amortization are not applicable in these valuations because the buyer forms a new entity at the time of close and gets a new depreciation schedule for the assets. This renders the company’s current taxes, depreciation, and amort figures meaningless.

Further adjustments are also typically made to this figure to add back in one owner’s excess compensation and benefits, and any other non-recurring expenses.

How EBITDA Multiples Vary Based on Industry

This could be a series of blogs in and of itself. The short of it is:

  • Industries with a high level of cyclicality will trade at lower multiples than industries that are more durable.
  • Industries with lower barriers to entry will trade for lower multiples than those with higher barriers to entry.
  • Industries with non-recurring or non re-occurring revenue trade for lower multiples than those that do.
  • Industries that are being targetted by private equity groups for rollups trade at higher multiples than those that are not. NOTE: these are often-times fragmented, low barrier to entry industries which refutes the point above.

Related Content

We put together a comparable guide on valuing companies based on revenue. It is applicable to high-growth companies and those with contractually recurring revenue.

How Growth Impacts Earnings (EBITDA) Multiples

It increases it. However, for a small business, it is very difficult to get outlier valuations based on growth. The investment groups that are willing to pay high EBITDA multiples for growing businesses typically look for deals with $5m in sales or well above and for companies that have some technological or proprietary advantage.

For companies that are above $5m in revenue and have some differentiation that is supporting their rapid growth, they will trade at a higher multiple (and sometimes a revenue multiple) than those that are mature and stagnant.

Additionally, if you have a large total addressable market (TAM) AND differentiation to support your growth, you’ll get a litany of very attractive, high multiple bids for your business.

Are There Market Comps for EBITDA Multiple Transactions?

While the private markets announce when a transaction has closed, it is quite rare to announce what EBITDA multiple a company was purchased at.

Even if there are EBITDA multiple comps that are similar to your business, there are enough variables in the deal structure, leadership position of the target company, and background of the acquirer that the metrics are not very helpful. 

For instance, a growing business that trades at 5X Adj. EBITDA with 90% cash at close may be a better deal for the seller than a business that trades at 6X with 20% rollover, 30% earnout, and only 50% cash paid at close.

You can learn more about this in our how much can you sell your business for article.

Request A Consultation

If you’re interested in selling your business and looking to work with a professional in doing so, we’d welcome you to tell us a bit about your business and request a complimentary consultation. We can let you know if now is the time to sell or not and give you an idea of what your business should trade at.