What Does Multiple of EBITDA Mean?
Multiple of EBITDA, or EBITDA multiple, is used to determine the potential value of a company. This computation can be used by an investor who plans to acquire another company. However, some financial experts do not advise this valuation method because important variables, like depreciation and amortization, are excluded from the calculation.
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Divestopedia Explains Multiple of EBITDA
Multiple of EBITDA is calculated as enterprise value of a company / most recent EBITDA of same company.
To value your company, the first step is to computing the multiple of EBITDA for a variety of publicly traded companies in the same industry. This will provide a statistically significant population that gives the multiple of EBITDA a higher reliability, which when applied to your company's EBITDA it will result in a more accurate value. To determine the enterprise value of your company by using EBITDA, multiply the multiple of EBITDA by your company’s most recent EBITDA.
For example, a manufacturing company called AB Inc. looking to value their business. A comparable public company has an enterprise value of $25,000,000. The most recent EBITDA of said company is $5,500,000. Using the multiple of EBITDA formula, $25,000,000 (enterprise value) / $3,000,000 (most recent EBITDA), the multiple of EBITDA is 4.5x.
The multiple of EBITDA is calculated for 12 other similar public companies in order to determine the average multiple of EBITDA, which is 4.8x. Knowing this average, the value of AB Inc. with a most recent EBITDA of $3,000,000, can be calculated as:
4.8x (Average multiple of EBITDA) x $3,000,000 (Most recent EBITDA) = $14,400,000