EBITDA Multiples Explained: A Double-Edged Sword in Valuations
When valuing a business, EBITDA multiples often come into play as a popular and straightforward tool. EBITDA, which stands for Earnings Before Interest, Taxes, Depreciation, and Amortization, focuses on a company’s core operational performance. By applying a multiple to EBITDA, you can estimate the value of a company while ignoring variables like tax structures, financing decisions, and accounting policies. However, while EBITDA multiples are widely used in mergers and acquisitions (M&A), private equity, and financial assessments, they are not without their limitations. Over my career, I’ve observed both the strengths and pitfalls of this method, and I’ll explain how it works, when it’s useful, and the risks of relying on it exclusively. What Are EBITDA Multiples? EBITDA multiples are used to estimate a company’s value based on its earnings before deductions for interest, taxes, depreciation, and amortization. The formula is simple: Business Value = EBITDA × Multiple The multiple ...