EBITDA Valuation

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EBITDA Valuation Method

There are multitudes of ways to value a company, as well as specific equity and debt claims on a company’s assets. One is the EBITDA valuation method, which relies on a multiple of EBITDA to arrive at a company’s enterprise value.

The definition of enterprise value is the total value of a firm’s equity and debt. It can also be thought of as the total market value of a company’s expected cash flow stream. A company’s EBITDA is a measure of that stream. Furthermore, EBITDA is a company’s net income with tax, interest, depreciation, and amortization expenses added back. It is not an exact measure of a company’s cash flow, but it is one which has gained wide acceptance in the banking and investment communities.

Use the following enterprise valuation formula:

Enterprise Value = Multiple * EBITDA

where EBITDA is typically projected for the next twelve months. Sometimes, the amount used is the actual EBITDA of the company over the last twelve months. Label it as “LTM EBITDA.”

EBITDA Valuation Multiple

Base the multiple on comparable actual sales transactions occurred recently in the company’s industry. Often, one will use the derived multiples of publicly traded companies in the industry in addition to or in lieu of actual transactions.

Also, while you may use a single value for the EBITDA multiple, you often get a range. This range is based on the distribution of comparable multiples, with abnormally high or low multiples excluded so as to provide a useful range for the end user of the valuation.

Valuing Equity Using the EBITDA Valuation Method

Use the EBITDA valuation method to value a company’s total equity. After arriving at the company’s enterprise value using the formula described above, subtract the net debt of a company to determine the value of the equity claim on the firm’s total cash flow. Methods used to directly value equity adjust the firm’s cash flow to yield the cash flow available to shareholders. This is also known as “Free Cash Flow to Equity.”

Use the following formula to value equity using the EBITDA valuation method:

Equity Value = Enterprise Value – Total Debt – Cash and Cash Equivalents

Problems with the EBITDA Valuation Method to Value Equity

The primary problem is that this method relies on EBITDA as a measure of a firm’s cash flow, ignoring other significant factors which can impact a company’s cash flow, such as changes in working capital and capital expenditures. If you’re looking to sell your company in the near future, download the free Top 10 Destroyers of Value whitepaper to learn how to maximize your value.

ebitda valuation

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6 Responses to EBITDA Valuation

  1. vuong February 13, 2019 at 12:54 pm #

    Please recheck formular

    Equity Value = Enterprise Value – Total Debt – Cash and Cash Equivalents

    It’s somthing wrong!!?

    My point of view is “+ Cash and Cash Equivalents”

    Is this correct?

    Thank you!

  2. Jamshed Soonawalla February 17, 2019 at 11:27 pm #

    u r right!

  3. Andres Alemany March 4, 2019 at 12:24 pm #

    Should be + Excess in Cash and Cash Equivalents. There is a need for working capital(WK), so only the excess in net WK should be added.

  4. Shaibal Chatterjee March 25, 2019 at 8:58 am #

    Hello !

    Simply put it is:-

    Equity Value = Enterprise Value – NET Debt [Gross Debt – Excess Cash, if any]

  5. Tom September 20, 2019 at 9:49 am #

    Lets say that you have inventory. If you get an offer of 6x last year’s EBITDA, would that price typically include your inventory? Second Question: If last year was down over the year before last… how common is it that the buyer won’t average the last 2 years EBITDA?

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