Business Valuation Calculator
Estimate the market value of your company using the EBITDA Multiple method.
Valuation Summary
How to Value a Business: Understanding the EBITDA Multiple
Valuing a business is both an art and a science. For small to medium-sized enterprises (SMEs), the most common approach is the EBITDA Multiple Method. This method focuses on the company's ability to generate cash flow from its core operations.
What is EBITDA?
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It serves as a proxy for the operational cash flow of a business. By removing non-cash expenses (depreciation/amortization) and capital structure costs (interest/taxes), investors can compare the "earning power" of different companies on an equal playing field.
The Role of the Multiple
The "Multiple" is a factor used to determine the Enterprise Value. This number varies significantly based on the industry, growth potential, and risk profile. For example:
- SaaS/Tech: Often 6x to 12x EBITDA due to high scalability.
- Manufacturing: Typically 4x to 6x EBITDA.
- Service Businesses: Often 2x to 4x EBITDA.
Example Calculation
Imagine a professional services firm with the following financials:
- Annual Revenue: $2,000,000
- Operating Expenses: $1,500,000
- EBITDA: $500,000
- Industry Multiple: 4.0x
- Debt: $100,000
- Cash: $50,000
The Enterprise Value would be $500,000 x 4 = $2,000,000. To find the final equity value (the price a buyer might pay), we add the cash and subtract the debt: $2,000,000 + $50,000 – $100,000 = $1,950,000.
Factors That Increase Your Valuation Multiple
If you are looking to sell your business, focus on these "multiple drivers" to increase your final exit price:
- Recurring Revenue: Subscription models are worth more than one-time sales.
- Low Owner Dependency: A business that runs without the founder is more valuable.
- Customer Diversification: No single client should represent more than 10-15% of revenue.
- Growth Trends: A company with a 20% year-over-year growth rate commands a higher multiple than a stagnant one.