What is an EBITDA Multiple and
What Kind Would My Company Warrant
WHAT IS AN EBITDA MULTIPLE?
This is more complicated than just assuming that the “going rate” multiple is 4 times. Firstly, a multiple is
simply the inverse of the rate of return that an investment in a business should return to the shareholders.
If the rate of return expectation over the long term is 25%, then 1 divided by 25% equals 4; therefore the
multiple is 4x.
EBITDA represents cash flow available to all shareholders in the business, most notably, business owners
and bankers. Therefore, the multiple on these cash flows should correspond to their respective expected
rates of return on the capital that they have invested in the business.
A cash flow multiple must be matched appropriately to the “right” income stream. Meaning if you are using a
pre-tax income stream the multiple should be based on a pre-tax rate of return. Similarly, if the income stream
is available only to the shareholders after paying out all taxes and interest costs, the multiple should be one
that includes the rate of return for shareholders on an after tax basis.
CALCULATING THE EBITDA MULTIPLE
There are several technical components involved in calculating an EBITDA multiple:
n Equity Rate of Return
n Interest Rate on Debt
n Appropriate Capital Structure (percentage of debt and equity or debt to equity ratio)
n Expected sustainable growth rate for EBITDA
n Capital expenditures as a percentage of EBITDA
Outlined below is a sample calculation of an EBITDA multiple.
Equity rate of return is calculated using a build-up approach, meaning we start with a risk free rate of return
(government of Canada bond) of say 5%. To that we add risk premiums, as the risk profile of the investment
increases. For example:
Risk free rate - long Canada bonds 5%
Add: Public market equity risk premium 5%
Add: Public market small/micro cap size premium 5%
Add: Company specific factors 5%
Add: Liquidity premium for privately held equity investment 5%
After tax rate of return on Equity 25%
Tax rate 30%
Pre-tax rate of return on Equity 36%
n For the interest rate on long term debt we will assume a blended rate of 10% for all long term debt
(conventional term and sub debt).
n As for the appropriate capital structure we can assume a debt to equity ratio of 1 to 2, which
corresponds to debt of 33% and equity of 66%
n Expected sustaining growth rate for EBITDA of 5%
What is an EBITDA Multiple and What Kind Would My Company Warrant 1
n Capital expenditures as a percentage of EBITDA of 10% - meaning that if EBITDA is $2 million, capital
expenditures to support the growth of 5% (above) is approximately $200,000 per year.
Using these components, the EBITDA multiple is calculated as follows:
Pre-tax return on equity C 36%
Debt rate D 10%
Growth rate G -5%
Appropriate amount of debt per leverage analysis: E 33%
Value of levered equity F 67%
WACC = ((E/(E+F)*D)+((1-E/(E+F))*C) + G WACC 22%
EBITDA before CAPEX Multiple 1/WACC = F 4.5
CAPEX as a % of EBITDA G 10%
EBITDA multiple - after CAPEX F - G = Net EBITDA Multiple 4.0
In summary, the illustration above is the detailed way to determine an EBITDA multiple. When someone tells
you they got a 4 x EBITDA for their business, you will understand what it means.
WE ARE FREQUENTLY ASKED “WHAT KIND OF EBITDA MULTIPLE WOULD A
COMPANY LIKE MINE GET?”
Now that the EBITDA multiple mystery is untangled, the more pressing question business owners ask is “What
kind of EBITDA multiple would a company like mine get?” EBITDA multiples are often discussed loosely and
can depend on what EBITDA is used and how EBITDA is positioned when selling. Is the valuation based on
a 12 month trailing basis, weighted average, forecast results, or a combination of historical and forecasted
results? Is the working capital surplus included and what other normalizations to EBITDA are reflected?
Consider the following example of Zenith Manufacturing with the following EBITDA profile.
Zenith 2009 2010 2011 2012 months 2013 forecast
EBITDA $1.0 million $1.2 million $1.3 million $1.4 million $1.5 million $1.5 million
As illustrated in Scenario A, a 4x EBITDA multiple results in dramatically different results depending on what
EBITDA is being discussed.
Zenith Manufacturing Scenario A Scenario B
Enterprise Enterprise Implied
EBITDA Multiple Value Value Multiple
Simple 4 year Average $1.2 million 4.0 x $4.9 million $5.5 million 4.5 x
Weighted Average $1.3 million 4.0 x $5.2 million $5.5 million 4.2 x
Most recent fiscal year $1.4 million 4.0 x $5.8 million $5.5 million 3.8 x
Trailing 12 months $1.5 million 4.0 x $6.0 million $5.5 million 3.7 x
Forecast $1.5 million 4.0 x $6.0 million $5.5 million 3.7 x
What is an EBITDA Multiple and What Kind Would My Company Warrant 2
Furthermore, Scenario B shows that the EBITDA multiple can be significantly different when discussing the
same purchase price. What level of EBITDA multiple does a business garner in the marketplace when the
time comes to sell is based on a number of factors, some of which include:
n The economic outlook and forecast
n The quality of the management team
n The competitiveness of the industry
n Balance sheet condition
n Historical growth profile
n Consistency of track record
Equicapita is a private equity fund that acquires established, private, small and medium sized
enterprises (“SMEs”) located primarily in Western Canada. Equicapita's investment drivers are to
acquire operating companies at attractive valuations, with a history of generating sustainable cash
flow and proven management teams. Equicapita believes that there is:
- a generational opportunity to acquire ‘baby boomer’ SMEs; and
- a funding gap in the $2 to $20 million enterprise value range.
The retirement of baby boomer business owners has been described as triggering one of the
biggest transfers of corporate assets on record in Canada. This creates an environment with an
abundance of opportunities to acquire SMEs with long-term operating histories, at attractive cash
flow multiples. Equicapita provides investors with access to this alternative asset class via an
efficient RRSP eligible structure.
The information, opinions, estimates, projections and other materials contained herein are provided as of the
date hereof and are subject to change without notice. Some of the information, opinions, estimates, projections
and other materials contained herein have been obtained from numerous sources and Equicapita and its
affiliates make every effort to ensure that the contents hereof have been compiled or derived from sources
believed to be reliable and to contain information and opinions which are accurate and complete. However,
neither Equicapita nor its affiliates have independently verified or make any representation or warranty, express
or implied, in respect thereof, take no responsibility for any errors and omissions which maybe contained herein
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materials be considered as investment advice or as a recommendation to enter into any transaction. Additional
information is available by contacting Equicapita or its relevant affiliate directly.
What is an EBITDA Multiple and What Kind Would My Company Warrant 3