For most businesses with EBITDA of $1,000,000 - $10,000,000, the EBITDA multiple will be in the general range of 4.0x to 6.5x, increasing as EBITDA increases.
The ratio of enterprise value to earnings before interest, taxes, depreciation, and amortization (EV/EBITDA) compares the value of a company—debt included—to the company's cash earnings minus non-cash expenses.
The multiplier for a small to midsized business will generally fall between 1 and 3‚ meaning‚ that you will multiply your earnings before interest and taxes (EBIT) by either 1X‚ 2X or 3X. For larger‚ more established organizations‚ the multiplier can be 4 or higher.
To find the fair market value, it is then necessary to divide that figure by the capitalization rate. Therefore, the income approach would reveal the following calculations. Projected sales are $500,000, and the capitalization rate is 25%, so the fair market value is $125,000.
Generally speaking, most businesses will sell for between 6 and 10 times their annual EBITDA depending on factors such as size, industry, competitive landscape, and geographic location.
EBITDA may be calculated for a company's accounting period. LTM (Last Twelve Months) EBITDA is a valuation metric representing all earnings before adjustments associated with interest, tax, depreciation, and amortization in the past 12 months. LTM EBITDA is also known as TTM (Trailing Twelve Months) EBITDA.
Companies with higher EV/EBITDA multiples may indicate higher growth expectations, stronger market positions, or unique competitive advantages. Conversely, companies with lower multiples may suggest potential undervaluation or less favorable market sentiment.
What are good ratios for a company? Generally, the most often used valuation ratios are P/E, P/CF, P/S, EV/ EBITDA, and P/B. A “good” ratio from an investor's standpoint is usually one that is lower as it generally implies it is cheaper.
A strong EBITDA is considered to be at least two times the company's interest expense. For example, if a company's annual interest expense is $1 million, then a strong EBITDA would be at least $2 million. In some industries, a higher EBITDA margin above 15% or more, may be considered favorable.
To calculate multiples, select comparable firms, gather financial data, and compute metrics like P/E, EV/EBITDA, and P/S. Average multiples from comparables and apply them to the target's metrics for an estimated valuation. Conduct sensitivity analysis and adjust for differences. Cross-check results for consistency.
The Main Difference Between SDE and EBITDA
SDE – The primary measure of cash flow used to value small businesses and includes the owner's compensation as an adjustment. EBITDA – The primary measure of cash flow used to value mid to large-sized businesses and does not include the owner's salary as an adjustment.
The formula is:EBITDA multiple = enterprise value / EBITDAEBITDA is the income from the company's operations before non-cash expenses, income tax or interest.
The Revenue Multiple Method
The revenue multiple used often falls between 0.5 to 5 times yearly revenue depending on the industry. For a company doing $2 million in gross annual sales, that could equate to a business valuation between $1 million (0.5X multiplier) up to $10 million (5X yearly sales).
The Rule of 40 states that the sum of a healthy SaaS company's annual recurring revenue growth rate and its EBITDA margin should be equal to or exceed 40%. It is a measure of how well a SaaS balances growth with profitability.
Commonly, a business with a low EBITDA multiple can be a good candidate for acquisition. An EV/EBITDA multiple of about 8x can be considered a very broad average for public companies in some industries, while in others, it could be higher or lower than that.
LUXURY BRANDS STAVE OFF RECESSIONARY HEADWINDS
This pricing dynamic has continued amid the volatile economic conditions experienced to start 2023, with the average multiple for luxury brands standing at 15.2x EV/EBITDA, outpacing the S&P 500 average of 13.8x EV/EBITDA.
A good revenue multiplier typically ranges from 1 to 3 times annual revenue for most small businesses. However, this can vary significantly based on industry, market conditions, and specific business characteristics.
The Interest Limitation Rule (ILR) is intended to limit base erosion using excessive interest deductions. It limits the maximum net interest deduction to 30% of Earnings Before Interest, Taxes, Depreciation, Amortization (EBITDA). Any interest above that amount is not deductible in the current year.
EBITDA indicates how well the company is managing its day-to-day operations, including its core expenses such as the cost of goods sold. As such, it is a very fair indicator of a business's current state and potential. In some cases, it is much fairer than either gross profit or net income.
The other way round: the first million euros in interest is deductible, but after that the amount of deductible interest may not exceed 20% of the profit (more accurately: 20% of the fiscal EBITDA).
Main Street Deals (Sub $3m Revenue)
Companies with under $3m in sales will typically sell for 2.5 – 3.5 X their discretionary earnings (total cash the owner could take out of the company). Smaller companies that are even more owner-reliant will even be lower than that.
By ignoring depreciation, Ebitda fails to account for the ongoing capital requirements necessary to replace aging assets. As a result, investors may underestimate the future capital needs of the company, leading to underinvestment and potential operational challenges down the line.
Generally speaking, a good EBITDA margin for manufacturing businesses falls between 5% and 10%. However, this will vary depending on the specific industry you are manufacturing your products for, and how capital-intensive your operations are.