What is a reasonable EBITDA multiple for a small business?
Generally, the multiple used is about four to six times EBITDA. However, prospective buyers and investors will push for a lower valuation — for instance, by using an average of the company's EBITDA over the past few years as a base number.
The most common method used to determine a fair sale price for a business is calculating a multiple of EBITDA (earnings before interest, taxes, depreciation and amortization), which is a measure of a company's ability to generate operating earnings.
The EV/EBITDA Multiple
Typically, EV/EBITDA values below 10 are seen as healthy. However, the comparison of relative values among companies within the same industry is the best way for investors to determine companies with the healthiest EV/EBITDA within a specific sector.
Small businesses are commonly valued by their price-to-earnings ratio (P/E), or multiples of profit. The P/E ratio is best suited to companies with an established track record of annual earnings. In most cases, working out the proper price-to-earnings ratio to use is determined by profits.
In general, smaller businesses (with transaction values between $10 - $25 million) are worth less and have lower multiples of between 5.0x to 6.0x, and larger business (with transaction values between $100 - $250 million) are worth more and have higher multiples of between 7.0x and 9.0x.
Typically, valuing of business is determined by one-times sales, within a given range, and two times the sales revenue. What this means is that the valuing of the company can be between $1 million and $2 million, which depends on the selected multiple.
- EBITDA = Net Profit + Interest + Taxes +Depreciation + Amortization.
- EBITDA = Operating Income + Depreciation + Amortization.
An EBITDA margin of 10% or more is typically considered good, as S&P-500-listed companies have EBITDA margins between 11% and 14% for the most part.
What EBITDA Will Be Used In My Private Company Valuation? It is common practice to utilize the most recent trailing twelve months EBITDA in calculating Enterprise Value, albeit in certain circ*mstances it may be more appropriate to use an average EBITDA of the last 2 or 3 years.
| Industry | EBITDA Average Multiple |
|---|---|
| Retail, general | 14.70 |
| Retail, food | 8.89 |
| Utilities, excluding water | 12.74 |
| Homebuilding | 10.52 |
What is the rule of thumb for valuing a business?
The most commonly used rule of thumb is simply a percentage of the annual sales, or better yet, the last 12 months of sales/revenues.
Add up the value of everything the business owns, including all equipment and inventory. Subtract any debts or liabilities. The value of the business's balance sheet is at least a starting point for determining the business's worth. But the business is probably worth a lot more than its net assets.
The formula is quite simple: business value equals assets minus liabilities. Your business assets include anything that has value that can be converted to cash, like real estate, equipment or inventory.
Typically, the selling range for small businesses is between two-times and three-times earnings. Outliers may be multiples of one-time or less or four-times or more.
A standard valuation formula is to take 3 times your gross revenue. So if your gross revenue is $1 million, your valuation would be $3 million. If you are selling your company, the idea is that the new owner could recuperate his investment in a short time: three years.
A business will likely sell for two to four times seller's discretionary earnings (SDE)range –the majority selling within the 2 to 3 range. In essence, if the annual cash flow is $200,000, the selling price will likely be between $400,000 and $600,000.
EBITDA is the primary measure of cash flow used to value mid to large-sized businesses and does not include the owner's salary as an adjustment.
The EBITDA margin calculated using this equation shows the cash profit a business makes in a year. The margin can then be compared with another similar business in the same industry. An EBITDA margin of 10% or more is considered good.
A low EBITDA margin indicates that a business has profitability problems as well as issues with cash flow. On the other hand, a relatively high EBITDA margin means that the business earnings are stable.
EV/EBITDA – Low or High Multiple? A high EV/EBITDA multiple implies that the company is potentially overvalued, with the reverse being true for a low EV/EBITDA multiple. Generally, the lower the EV-to-EBITDA ratio, the more attractive the company may be as a potential investment.
What does 10X EBITDA mean?
10X LTM EBITDA means, as of the specified date, the product of (i) 10.0 multiplied by (ii) the EBITDA for the twelve months ended as of the last day of the month immediately preceding the measurement date.
nationally the average business sells for around 0.6 times its annual revenue. But many other factors come into play. For example, a buyer might pay three or four times earnings if a business has market leadership and strong management.
There are five main methods used when conducting a property evaluation; the comparison, profits, residual, contractors and that of the investment. A property valuer can use one of more of these methods when calculating the market or rental value of a property.
To employ EBITDA to value a business, look at other organizations in the same industry that have sold recently, and compare their selling prices to their EBITDA information. This yields a multiple of selling prices to EBITDA that can be used to arrive at a general estimate of what a company is worth.
When valuing a company as a going concern, there are three main valuation methods used by industry practitioners: (1) DCF analysis, (2) comparable company analysis, and (3) precedent transactions.
The company's enterprise value is sum of its market capitalization, value of debt, (minority interest, preferred shares subtracted from its cash and cash equivalents.
| Estimated Company Value | Stage of Development |
|---|---|
| $500,000 - $1 million | Has a strong management team in place to execute on the plan |
| $1 million - $2 million | Has a final product or technology prototype |
| $2 million - $5 million | Has strategic alliances or partners, or signs of a customer base |
Generally, the lower the EV-to-EBITDA ratio, the more attractive the company may be as a potential investment. A low EV-to-EBITDA ratio could signal that a stock is potentially undervalued.
What EBITDA Will Be Used In My Private Company Valuation? It is common practice to utilize the most recent trailing twelve months EBITDA in calculating Enterprise Value, albeit in certain circ*mstances it may be more appropriate to use an average EBITDA of the last 2 or 3 years.
An EBITDA margin of 10% or more is typically considered good, as S&P-500-listed companies have EBITDA margins between 11% and 14% for the most part.
What is a good EBITDA by industry?
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EBITDA Multiples By Industry.
| Industry | EBITDA Average Multiple |
|---|---|
| Retail, food | 8.89 |
| Utilities, excluding water | 12.74 |
| Homebuilding | 10.52 |
| Medical equipment and supplies | 32.70 |
Determinants of Value/EBITDA Multiples
As tax rate increases, multiple decreases. Firms with large net operating losses should sell for higher Value/EBITDA multiples. As tax rates increase, Value/EBITDA multiples should go down.
