Skip to main content

EBITDA Multiples

Sale price expressed as a multiple of earnings, the basis on which most non-tech businesses are priced.

What the Multiple Is​

A headline sale price is usually two numbers multiplied together: an earnings figure and a multiple. EBITDA stands for earnings before interest, taxes, depreciation, and amortization, and it serves as a rough proxy for the cash a business throws off. Burlingham defines it plainly as the basis on which non-tech companies are valued.

"EBITDA: Earnings before interest, taxes, depreciation, and amortization; a rough proxy for 'free cash flow' and the basis on which non-tech companies are typically valued."

Burlingham, Finish Big, ch. 3

Warrillow frames EBITDA as the profit figure that the multiple is then applied to. The multiple itself is the factor (for example, 5x) that converts one year of earnings into a purchase price.

"Multiple: The factor (e.g., 5x EBITDA) applied to earnings or revenue to estimate sale price."

Warrillow, The Art of Selling Your Business, ch. 12

EBITDA Versus SDE​

The right earnings figure depends on the size of the business and how involved the owner is. McDannell separates the two metrics by scale: EBITDA suits larger, more turnkey firms, while smaller owner-operated businesses are valued on Seller's Discretionary Earnings (SDE), which adds the owner's pay back into profit. Both authors treat EBITDA for a small owner-run company as roughly synonymous with net profit. The earnings figure is rarely the raw number from the tax return; it is normalized through add-backs (removing owner-specific and one-time costs) so it reflects performance in a buyer's hands. See Add-Backs and Normalization and Seller's Discretionary Earnings (SDE).

What Moves the Multiple​

The earnings figure is largely fixed by the books; the multiple is where value is won or lost. It varies by industry, but within an industry it expands or contracts based on risk and quality. McDannell notes that intangibles justify paying above the average.

"The multiple: Sale price as a multiple of earnings (e.g., 4.5x); varies by industry; intangibles (team, reputation, recurring revenue) justify above-average multiples."

McDannell, Get Acquired

Recurring revenue, low Customer Concentration, a management team that runs the business without the owner, and a defensible value proposition all push the multiple up. Warrillow's most dramatic example is a company that moved from 3x to 13x EBITDA largely by being positioned in the acquirer's mind as a category leader. A strategic buyer who captures synergies can pay a multiple a financial buyer never would. See Strategic vs Financial Buyers and The Strategic Premium.

The Comparables Trap​

Owners often anchor on the wrong benchmark. Warrillow warns against comparing a small private company to a large public one, because small companies trade at a steep discount regardless of how good they are.

"Apples-to-bananas comparables: Benchmarking a small private company against a large public one (e.g., 20x NYSE medtech) leads to disappointment; small companies trade at deep discounts."

Warrillow, The Art of Selling Your Business, ch. 12

McDannell adds that the headline figure is ultimately set by the market, not by a formula: a company is worth what someone is willing to pay. A multiple is a useful estimating tool, but the real price emerges from competition among buyers, which is why generating Multiple Offers as Leverage matters more than any single calculation.

Further Reading​

Sources: McDannell, Get Acquired ch.3; Burlingham, Finish Big ch.3; Warrillow, The Art of Selling Your Business ch.12.