How Many Times EBITDA is a Business Worth? (Quick Answer)
Finding the value of a business by calculating how many times EBITDA is worth is a process that requires careful consideration and analysis.
As held in high regard by many M&A professionals, EBITDA is used to evaluate profitability and is, therefore, a critical ingredient for determining a company’s valuation. However, the question remains – how exactly can you measure this?
This quick guide will show you the ropes of calculating this relevant metric and help you chart the complexities in the waters of M&A.
TL;DR Summary - Quick Answer
Let’s have a quick overview of the key points we’ll cover in this blog:
EBITDA measures a company’s profitability and growth potential.
A high EBITDA is often a positive indicator of a company’s finances.
EBITDA, while helpful to M&A professionals, is just a small piece of a company’s financial pie.
The metric is often used together with other relevant data to assess a company’s financial position.
EBITDA multiples vary across industries, with high-growth industries commanding higher multiples on average.
Market conditions have a significant effect on EBITDA multiples.
For acquisition, a lower EBITDA is often better.
EBITDA and Its Importance in Valuation
Before we answer the big question of how many times EBITDA is a company worth, we’ll dive into the EBITDA basics.
What is EBITDA?
EBITDA is a financial metric that gives you a preview of a company’s performance. Billionaire John Malone coined the metric in the 1970s to analyze the capability of telecom companies to generate cash.
Why is EBITDA important?
Today, EBITDA is widely used in finance thanks to its versatility and usefulness in comparisons. For starters, the metric compares companies with their peers in the same field. EBITDA also provides a glimpse into a company’s potential for profitability and growth.
On top of that, M&A teams also find value in the EBITDA when evaluating potential deals. However, know you’ll need a capable M&A team to assess this. Having a skilled team ensures thorough analysis, considering multiple factors and industry nuances to make strategic decisions.
Is a high EBITDA good?
In the majority of cases, yes. While high EBITDA is often good, it must not be the sole indicator of a company’s financial health. A high EBITDA value typically indicates high profitability even after considering a company’s interest, taxes, depreciation, and amortization.
Because it’s just one piece that completes a company’s complex financial puzzle, the EBITDA should be in conjunction with other factors to gain comprehensive insights into its financial standing. Other factors, such as debt levels and cash flow, can also be excellent determinants.
What is a good EBITDA multiple?
When discussing good multiples of EBITDA, it’s essential to recognize that “good” depends on various factors. A general average multiple of 8 encompasses all industries, but this can be considered high or low depending on the industry.
Let’s take a look at the bigger picture. To have a more accurate idea if an EBITDA multiple is good, compare it to the values of other companies within a specific industry. That way, you’ll better understand whether the EBITDA multiple meets industry norms and standards.
How Many Times EBITDA is a Business Worth?
Now, for the big question: how many times EBITDA is a business worth? The answer varies greatly.
EBITDA valuation multiples by industry
6.8 to 11.2
Transportation and Logistics
Media and Entertainment
Hospitality and Tourism
Aerospace and Defense
How to Calculate EBITDA
Let’s go step by step to figure out a company’s EBITDA.
EBITDA multiple formula
EBITDA Multiple = Enterprise Value/EBITDA
where EBITDA= Net Income + Interest + Taxes + Depreciation + Amortization
Example of EBITDA calculation
Let’s say a company has the following financials:
Net Income: $800000
Interest Expense: $30000
Here’s how we will calculate the EBITDA:
EBITDA= Net Income + Interest + Taxes + Depreciation + Amortization
EBITDA = $800000 + $30000 + $50000 + $50000 + $20000
EBITDA business valuation calculator
Based on the provided EBITDA value, you can calculate the enterprise valuation. This time, consider the EBITDA multiple based on the industry in which it operates. If the company is in the tech sector, it has an EBITDA multiple of 13.6.
Enterprise Value = EBITDA Multiple × EBITDA
Enterprise Value = 13.6 × $950000
Enterprise Value = $12920000
Alternatively, the Exit Wise valuation calculator is an easier way to determine a business’ valuation based on EBITDA.
Factors Influencing EBITDA Multiples
Several factors influence EBITDA multiples. Let’s find out more about them below:
Previously, we acknowledged that specific sectors outperform others in terms of EBITDA multiples, which raises the question of why these disparities exist.
The answer lies in each industry's relative risk levels and growth potential.
Take a look at the tourism industry, which has grown significantly post-pandemic. With a multiple of 15.9, it has a higher growth potential than other stable industries, such as transportation, with a multiple of 9.1.
Financial performance and growth
A company's financial performance and growth are critical factors that influence an EBITDA multiple. A higher multiple indicates that a company is highly profitable and stable while maintaining positive growth prospects.
For businesses, achieving sustained profitability over time is crucial for maximizing valuation. Note that a company's revenue growth also has a massive impact on its EBITDA multiple.
Because investors often assess the potential return on investment (ROI), companies that historically have a strong performance often command higher EBITDA multiples compared to their underperforming peers.
Market conditions and competition
The overall economic climate plays a significant role in determining EBITDA multiples. Business valuation multiples tend to be higher when there are favorable market conditions, as investors become more optimistic.
Conversely, because of economic downturns and other negative macro factors, these multiples tend to decrease as the market values stability and risk mitigation – hence, the more cautious approach toward EBITDA multiple valuations.
Just as important as the market conditions is the competition within industries. When a company provides differentiated offerings, it often commands premium valuations.
Investors acknowledge the value that these businesses provide to their respective markets. As a result, these companies demand premium valuations.
Frequently Asked Questions (FAQs)
We’re here to help you answer any extra questions you might have. Check out the list of FAQs below:
What is LTM EBITDA?
LTM EBITDA stands for Last Twelve Months Earnings Before Interest, Taxes, Depreciation, and Amortization. Keep in mind that it’s calculated just like the standard EBITDA formula.
The only difference is that the LTM EBITDA considers the financial performance over the most recent twelve-month period, being a more specific formula.
For stakeholders seeking up-to-date information on a company’s financial performance, the LTM EBITDA can provide more context for decision-making, given that it only considers recent data.
What is a good EBITDA margin by industry?
Long story short, it depends. The longer answer is that a good EBITDA margin is at least 10%. A higher EBITDA margin suggests a company has lower operating costs than its revenue. Meanwhile, a lower margin signifies poor cash flow.
Note that it isn’t as simple as evaluating this number independently. The assessment of a good margin depends on the sector, as each one has different profitability expectations.
Comparing the EBITDA margins of companies within the same industry could give you a better idea of what is considered competitive.
What is a good EBITDA multiple for acquisition?
For the acquisition of any company, a good EBITDA multiple will vary. An EBITDA multiple could be considered good enough for one company, while it would be considered poor in another. Generally, a business with a low EBITDA multiple is great for acquisition.
Investors and analysts agree that an EBITDA multiple below 10 is considered good. Then again, this is a broad estimate and could be higher or lower in some industries. Remember that EBITDA multiples tend to skew higher in profitable and high-growth sectors.
What is the rule of 40 in EBITDA?
The rule of 40 using EBITDA is a guideline often used in the tech industry to evaluate a company’s financial performance. Simply put, the rule of 40 means that the sum of the EBITDA margin and the revenue growth rate must exceed 40% for a company to be considered financially balanced.
There’s no better way to explain this than by demonstration. Let’s have a quick example.
Consider a hypothetical tech firm, XYZ Inc. According to financial data reported by the firm, their annual revenues were $60000000 and $78000000 in 2022 and 2023, respectively, indicating a growth rate of 30%.
However, when the EBITDA margin of tech firm X was calculated to be 5%, that would fall short of the required 40% to meet the rule of 40, as adding the two figures results in 35%.
In this hypothetical example, the EBITDA margin of this company must be at least 10% to be considered financially healthy.
That concludes our quick guide to calculating business valuations using EBITDA. As you can see, arriving at this figure requires a nuanced process that you must tread carefully to evaluate a company’s worth with high certainty.
Understanding all the intricacies of business valuations is paramount in the world of M&A. To help you navigate through all of this, it’s best to work with a powerhouse team of M&A professionals. Reach out to Exit Wise today to gain expert guidance.