What is an EBITDA multiple?

When a service company, a rental fleet, or a shop is bought or sold, the price is usually expressed as a multiple of EBITDA: earnings before interest, taxes, depreciation, and amortization. It is a rough measure of the cash the business throws off before the effects of how it is financed and how its equipment is written down. A business with a million dollars of EBITDA selling for four million has sold at four times.

What moves the multiple

• Customer concentration. One operator that is half the revenue is a risk, and buyers price it.
• Owner dependence. If the founder is the salesman, the estimator, and the best hand in the yard, the buyer is paying for something that leaves at closing.
• Equipment condition and age. A fleet that needs replacing soon is a hidden purchase price.
• Contracts and recurring work. Master service agreements and maintenance work are worth more than one-off jobs.
• Size. Larger businesses generally command higher multiples, because more buyers can finance them.

Add-backs

Sellers present adjusted EBITDA: the reported figure plus add-backs for expenses that will not continue under a new owner, such as the founder’s above-market salary, personal vehicles, or one-time costs. Legitimate add-backs are normal. Aggressive ones are where deals fall apart in diligence. A buyer should be able to trace every add-back to a line in the accounts.

What it is not

A multiple is a shorthand, not a valuation. Two businesses with the same EBITDA can be worth very different amounts depending on the working capital they need, the capital expenditure they face, and the risk in their customer list. The number you hear at the dinner table is the starting point, not the answer.

Related terms: SBA 7(a) loan, seller note.