EV/EBITDA multiple

What it means

The EV/EBITDA multiple is the ratio of enterprise value to EBITDA. Enterprise value includes both the value of equity and net debt, so it shows what a buyer would pay for the whole business regardless of how it is financed.

In a valuation it is used the other way round: the multiple from comparable deals or listed companies is multiplied by the target’s EBITDA to give enterprise value. After deducting net debt, the seller arrives at the value of their stake.

The size of the multiple depends on the sector, size, growth, risk and stability of revenue. Small firms with a single owner and few customers sell at lower multiples than larger companies with recurring revenue and established management.

How it works in practice

When preparing a sale, we work with adjusted EBITDA, cleaning out one-off items and normalising the owner’s pay to market level. Every euro of EBITDA is multiplied in a sale, so clean numbers have a direct impact on the price.

The multiple approach is quick and easy to understand, which is why it is used in early negotiations and to cross-check other methods such as DCF. It is important to compare with genuinely similar companies and deals, not large foreign groups.

When calculating net debt, the question is what belongs in it: bank loans, leases, shareholder loans, unpaid taxes or provisions. These items are negotiated and precisely defined in the sale agreement.

What to watch out for

The most common mistake is applying a multiple from news about large deals to a small company. A small company carries more risk and the buyer will pay a lower multiple. Unrealistic expectations often derail a sale before negotiations even start.

The second risk is an inflated EBITDA, for instance leaving out costs the owner pays privately or including a one-off gain. The buyer will find it in due diligence and cut the price, often by more than honesty from the start would have cost.