EBITDA Multiple

What is an EBITDA multiple?

EBITDA Multiple (also EV/EBITDA) denotes the ratio of enterprise value to EBITDA, the result before interest, taxes and depreciation and amortisation of tangible fixed assets and intangible assets. The enterprise value (Enterprise Value) is the value of the operating business that belongs to owners and lenders together. Applied to the EBITDA of a company to be valued, the multiple yields its enterprise value. Valuation using the EBITDA multiple is one of the multiple-based methods of business valuation.

The statement that a rented-out flat costs 25 times its annual rent is comparable: the multiple translates an annual income into a price. An EBITDA multiple of 6 means that six times its annual EBITDA is paid for the business.

The EBITDA multiple is among the most common valuation yardsticks in the purchase and sale of profitable companies. Strategic acquirers and financial investors often formulate their non-binding first offers (indicative offers) as a multiple of EBITDA adjusted for one-off effects, and banks size acquisition financings as a multiple of the same figure. In funding rounds of growth companies, it carries little meaning as long as EBITDA is negative. It gains weight as soon as a company becomes sustainably profitable and buyers from the circle of private equity investors come into consideration.

Calculating the EBITDA multiple: formula and reference figures

Formula: EBITDA multiple = enterprise value ÷ EBITDA; conversely enterprise value = EBITDA × multiple

The German Commercial Code (Handelsgesetzbuch, HGB) knows no EBITDA. The key figure is derived from the income statement: net income for the year plus taxes on income and earnings, plus interest expenses less interest income and plus depreciation and amortisation. Because there is no statutory definition, the purchase agreement and the valuation determine which items are included, for example other taxes, income from participations or currency effects.

Numerator and denominator must match. The enterprise value belongs to all capital providers, and EBITDA is a result before interest and is therefore likewise attributable to all capital providers. In terms of time, a distinction is made between the result of the last twelve months (LTM, Last Twelve Months), the current financial year and the planned result of the next twelve months (NTM, Next Twelve Months). A multiple based on the past is not comparable with a multiple based on the plan.

A frequently overlooked difference concerns leasing and rent. Under the international accounting standards (IFRS 16), lease payments no longer appear as operating expense for the lessee but as depreciation and interest, which raises EBITDA. Under the HGB, they generally remain operating expense. Comparable multiples of companies reporting under IFRS are therefore transferable only after adjustment to an HGB EBITDA. Conversely, anyone calculating with an IFRS EBITDA must count the lease liabilities as debt so that numerator and denominator fit together.

Comparable companies and transaction comparisons

Multiples come from two sources that reflect different prices. Trading comparables are listed companies whose enterprise value results from the market capitalisation of all shares plus net debt, that is, financial debt less liquid funds. Their multiples reflect the price of small, at any time tradable minority stakes.

Transaction comparisons (Precedent Transactions) are based on purchase prices paid in takeovers of comparable companies. They contain a premium for control of the company and in part the synergies of the buyer at the time, that is, its expected benefits from combining with its own business. For unlisted medium-sized companies, discounts relative to listed comparable companies are often discussed because they are smaller, less diversified and more dependent on individual persons. Which source is more meaningful in an individual case depends on the availability of reliable data.

Adjustment as a field of negotiation

The multiple is applied to a sustainable result, not to the chance result of a single year. Adjusted EBITDA corrects one-off expenses and income, non-market remuneration or rents between the company and shareholders and costs that fall away after the sale. Every adjustment acts on the enterprise value with the multiple. Buyers therefore review them individually in the financial due diligence, the review of the financial figures before the purchase, and recognise only what is documented.

Pro forma adjustments are particularly contested: effects that have not yet occurred, for example planned price increases or savings. They are usually recognised only with a discount or not at all. The capitalisation of development costs, which the HGB permits as an option, also shifts expense out of EBITDA into depreciation and amortisation and must be stripped out in comparisons.

From the multiple to the purchase price

The product of multiple and EBITDA is an enterprise value, not a purchase price for the shares. It is the bridge (Equity Bridge) that leads to the equity value, the value of the shares. Financial liabilities including shareholder loans and debt-like items such as pension provisions are deducted. Freely available liquid funds are added. In addition comes an adjustment to a normal level of net working capital.

The level of the multiple itself follows the characteristics of the company. Higher values are generally justified by growth, stable and recurring revenue, low capital intensity, a broad customer base and a management that does not depend on one person. For financial investors, financeability is added: the more debt a company can carry on the basis of its EBITDA, the higher the offer can be at the same target return.

Worked example: calculating enterprise value with an EBITDA multiple

A software provider owned by its founders is to be sold. The reported EBITDA of the last financial year is EUR 2.0 million. For comparable companies, a hypothetical range of 6.0 to 7.0 is assumed.

• Reported EBITDA: EUR 2.00 million
• Plus one-off costs of a concluded legal dispute: EUR 0.15 million
• Minus raising the below-market remuneration of the shareholder-managing director to a market salary: EUR 0.10 million
• Plus the part of the rent paid to a shareholder that is above the market level: EUR 0.05 million
• Adjusted EBITDA: 2.00 + 0.15 minus 0.10 + 0.05 = EUR 2.10 million
• Enterprise value: 2.10 × 6.0 = EUR 12.6 million to 2.10 × 7.0 = EUR 14.7 million
• Deduction items: bank loan 3.0 + shareholder loan 0.5 + pension provisions 0.4 minus liquid funds 1.2 = EUR 2.7 million
• Equity value: 12.6 minus 2.7 = EUR 9.9 million to 14.7 minus 2.7 = EUR 12.0 million

The adjustments raise EBITDA by a net EUR 0.10 million. At a multiple of 6.5, this corresponds to EUR 0.65 million of enterprise value. The calculation also shows how far enterprise value and equity value are apart: about a fifth of the enterprise value does not belong to the shareholders.

Distinctions: EBITDA multiple, revenue multiple and price-earnings ratio

• Revenue Multiple: relates the enterprise value to revenue. It is used for fast-growing companies without profit but says nothing about profitability.
• EBIT multiple: relates the value to the result before interest and taxes but after depreciation and amortisation. It is more meaningful for capital-intensive companies because EBITDA does not take account of the replacement of consumed assets.
• Price-earnings ratio: relates the equity value to net income for the year. It is an equity multiple and depends on debt and taxes.
• Exit Multiple: a multiple assumed for the time of a future sale, for example in the terminal value of a DCF valuation. The EBITDA multiple of an offer today, by contrast, refers to the present.

Common mistakes

• Multiple applied to equity. Anyone who understands the product of EBITDA and multiple as the purchase price of the shares overlooks the deduction items of the bridge.
• Different EBITDA definitions. Leasing under IFRS 16, capitalised development costs or differing delineations make comparable multiples unusable without adjustment.
• One-off income not adjusted. Adjustment works in both directions. The release of provisions or a one-off large order raise EBITDA without being sustainable.
• Investment needs ignored. Two companies with the same EBITDA are not worth the same if one of them has to reinvest a large part of its result every year.
• Past and plan mixed. An LTM multiple of comparable transactions must not be applied to the planned result of the next year.

Frequently asked questions

How is the EBITDA multiple calculated?

As enterprise value divided by EBITDA. For a valuation, the calculation is reversed. Adjusted EBITDA times the multiple of comparable companies gives the enterprise value, and after deduction of net debt and debt-like items, the value of the shares.

What EBITDA multiple is usual in each sector?

There is no universal figure, not even by sector. Multiples differ by size, growth, predictability of revenue and investment needs, and change with the level of interest rates. As a rule of thumb, smaller unlisted companies are often in the mid single-digit range. Only a range drawn from current, genuinely comparable transactions and market values is reliable.

What EBITDA multiple applies to software and SaaS companies?

Usually a higher one than for service providers or in retail, provided the company is profitable. Recurring revenue, low churn and growth without large investments make its result well predictable. As long as EBITDA is low or negative because of high growth spending, investors value SaaS companies (software on subscription) through the revenue multiple.

Why do smaller companies achieve lower multiples?

Because buyers assess their risk as higher. Smaller companies more often depend on individual customers or on the owner, are less diversified and have a smaller circle of possible buyers. With increasing size, financial investors and larger strategic acquirers come in, which widens the competition among bidders.

What is a pro forma EBITDA?

An EBITDA presented as if a particular event had already occurred at the start of the period, for example an acquisition or a cost reduction. It is a negotiating figure, not a figure of the annual financial statements, and is reviewed particularly critically by buyers.

The Roemer Capital view

Before a sale process, Roemer Capital prepares with the client the bridge from reported to adjusted EBITDA, every item with supporting evidence. What cannot be evidenced is not included, because an adjustment that falls in the due diligence costs more credibility than it brings in value.

This includes a uniform definition. Roemer Capital fixes the basis on which EBITDA is determined and converts the multiples from offers and comparisons to this basis. Only in this way can offers from different buyers, who work with different periods and delineations, be compared.