EBITDA Valuation of a business
Valuing a business using EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation) is a widely accepted and commonly used profit-based valuation method.
Adjusted EBITDA
When using EBITDA for valuation purposes, it is essential to calculate an “Adjusted EBITDA” figure. This process involves making normalising adjustments, including relevant add-backs, to present a more accurate reflection of ongoing operational profitability. Typical adjustments may include:
• Owner’s pension contributions, salary or bonuses that do not reflect market value
• Building expenses, repairs or maintenance expenses that should have been capitalised (e.g., improvements or office remodelling)
• Exceptional non-recurring or one-off expenses, such as legal or professional fees, donations, employee bonuses, or intellectual property costs (e.g., patents, trademarks)
Applying the EBITDA Multiple
Once the Adjusted EBITDA is calculated, a multiple is applied to derive the business’s value (or expected return if shares are sold).
This EBITDA multiple is typically based on industry averages, drawn from transaction data involving similar-sized businesses. For small to medium enterprises (SMEs), multiples often range between 2 and 5, but may reach 7 or 8, especially if a strategic purchaser is involved. In such cases, the buyer may be willing to pay a premium due to synergies or strategic advantages.
The actual multiple applied will depend on several factors—most notably market conditions, and growth potential.
Influences on Value
While the saying “higher risk, higher return” holds true for investors, in business valuation, lower risk translates to higher value. As such, valuation professionals closely assess the following risk factors, which can significantly influence the multiple used:
Factors that can enhance value:
• A turnkey /strong and independent management team
• Low reliance on the owner for day-to-day operations
• Blue-chip or well-diversified customer base
• Good revenue spread (No single customer contributing more than 10% of total revenue)
• High proportion of repeat revenue or contracted business
• Long-term contracts with suppliers and/or customers
• Operation in a niche or high-growth market
• Unique or hard-to-replicate offerings
• Low levels of competition
• Strong reputation
• Consistent revenue and profit growth
• Recognised accreditations or formal management systems
When assessing the value of a business, it’s essential to scrutinise both:
1. The adjustments made (or omitted) in calculating Adjusted EBITDA, and
2. The multiple applied to that EBITDA figure.
Both must be seen as fair and reasonable—otherwise, the resulting valuation may provide a misleading impression of the business’s true worth