The EBITDA multiple: what it is and why it differs for everyone

EBITDA is earnings before interest, taxes, depreciation and amortisation. It shows how much a business earns from operations and does not depend on how it is financed or where it pays tax. That is why EBITDA is the main yardstick for comparing companies in a purchase or a sale.

How a multiple works

Business value is roughly EBITDA multiplied by a multiple. An illustrative example: EBITDA of 1 million and a multiple of 3 give a value of 3 million. The numbers here are illustrative — a real multiple always depends on the particular company.

Why multiples differ

A multiple is the price per unit of profit, and it reflects risk and outlook. It is driven by:

• the industry and the size of the business;
• growth rate and how predictable revenue is;
• the share of recurring (subscription or contract) revenue;
• dependence on the owner and the depth of the management team;
• concentration of customers and suppliers;
• transparency of the accounts and legal cleanliness;
• country and market risk.

Common mistakes

• using the multiple of a large listed company for a small business — a small business usually trades noticeably lower;
• not normalising EBITDA: one-off income and costs, the owner’s salary and personal spending run through the company distort the picture;
• treating EBITDA and net profit as the same thing;
• forgetting debt and cash when moving from enterprise value to the price of the deal.

What to do with it in practice

Work out your normalised EBITDA and see which factors from the list above pull your multiple down. They are the main lever for raising value: lifting the multiple is often easier and faster than doubling profit.