What Does TTM EV/EBITDA Mean?
TTM EV/EBITDA is a financial metric often used by buyers to assess the reasonability of a target's valuation. It is actually a combination of the following three terms:
- "TTM" — Trailing twelve months;
- "EV" — Enterprise value; and
- "EBITDA" — Earnings before income taxes, depreciation, and amortization
When buyers value a company, they may use different valuation approaches such as the discounted cash flow or income approach to compute enterprise value. Once EV is calculated, it is then compared to the EBITDA that the target has achieved over the last twelve months to compute the TTM EV/EBITDA. This calculation is usually presented as a multiple (i.e., 3x or 4x) and is compared against other industry or transaction benchmarks to ensure it is a reasonable number.
Divestopedia Explains TTM EV/EBITDA
Since this is an important reasonability calculation for buyers, sellers should be prepared with monthly financial statements that present normalized EBITDA for the last twelve months. Sellers often only present their last 3 years worth of annual financial statements. Sellers should consider key normalization adjustments that would show a higher EBITDA, and consequently a lower TTM EV/EBITDA number. This is because buyers want their purchase price to be as low a multiple of TTM EBITDA as possible, and this can be accomplished by ensuring normalized EBITDA is properly represented. These normalization adjustments include fair market rent and wages, addbacks for extraordinary or one-time expenses, start-up costs, etc.