Enterprise Value and EBITDA Multiples: A Quick Guide for Private Business Valuations
Introduction
Enterprise Value (EV) and EBITDA multiples are widely used in the world of business valuation, particularly when it comes to estimating what a private company might be worth. While these terms are often thrown around in conversations about buying, selling, or investing in a business, they are also widely misunderstood. This article provides a practical, plain-language guide for private business owners and their advisors on how EV and EBITDA multiples work together to form a valuation—and what to watch out for.
What Is EBITDA and Why It’s Used
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It serves as a proxy for the business’s operating performance because it removes the effects of financing decisions, tax environments, and accounting choices.
EBITDA is particularly useful in valuation because:
- It focuses on the earnings generated purely from operations.
- It allows for comparisons between companies, regardless of how they are financed.
For private businesses, it’s critical to normalize EBITDA by adjusting for:
- Owner compensation above or below market
- Personal expenses run through the business
- One-time or non-recurring revenues or costs
What Is Enterprise Value? (Quick Recap)
Enterprise Value reflects the total market value of the operating business. It includes:
- The value of equity
- Outstanding debt
- Excludes excess cash or non-operating assets
The basic relationship:
Enterprise Value = EBITDA × Multiple
This formula allows us to estimate what a business might be worth based on its EBITDA and an appropriate multiple.
What Is an EV/EBITDA Multiple?
The EBITDA multiple represents the price a buyer is willing to pay for each dollar of EBITDA. It's essentially a shorthand for market expectations of value based on profitability.
The multiple reflects:
- Industry norms and trends
- Business size and scale
- Customer concentration or key-person risk
- Historical performance and future growth prospects
- Geographic market and competitive landscape
Typical private business multiples range from 2× to 5×, but can vary widely based on the above factors.
Where Do These Multiples Come From?
Multiples are usually derived from:
- Public company data (adjusted downward for private company differences)
- Databases of comparable transactions
- Valuation professionals with industry expertise
Caution: Don’t rely on generic industry averages or rules of thumb without context. What’s true for a large firm with low risk is rarely applicable to a small owner-managed company.
How to Use EV/EBITDA in Private Business Valuation
Here’s how to apply this method in practice:
- Normalize EBITDA
- Remove personal or discretionary expenses
- Adjust for one-time items or anomalies
- Select a Reasonable Multiple
- Use industry data as a guide
- Adjust for your business’s specific risks and strengths
- Apply the Formula
- Multiply normalized EBITDA by the selected multiple to calculate EV
- Adjust for Cash and Debt
- Subtract debt and add excess cash to get to equity value
Example: Quick Walkthrough
Let’s say your business has:
- Normalized EBITDA: $750,000
- Selected multiple: 3.5× (based on industry and risk profile)
EV = $750,000 × 3.5 = $2,625,000
You also have:
- Debt: $500,000
- Cash: $150,000
Equity Value = $2,6255,000 - $500,000 + $150,000 = $2,275,000
Pitfalls to Avoid
- Not normalizing EBITDA: This leads to over- or under-valuing the business.
- Applying public company multiples directly: Private businesses are riskier and less liquid.
- Ignoring business-specific risk factors: One-size-fits-all multiples are dangerous.
- Confusing EV and equity value: Always know which number you're talking about.
When to Use This Method—and When Not To
When it works:
- As a quick estimate or sanity check
- When reliable market data or comps are available
When to be cautious:
- In legal settings or disputes
- When the business has unusual income patterns or limited comparables
Conclusion
Using EBITDA multiples to estimate enterprise value can be a powerful valuation tool—if done correctly. For private businesses, context is everything. Always normalize earnings, choose your multiple carefully, and adjust for debt and cash to get a complete picture.
If you're unsure what multiple is appropriate or how to adjust EBITDA for your business, reach out to Troy Valuations. We help business owners make confident, well-supported decisions when it comes to value.