Valuation multiple, explained simply
If a company earns $1.0 million of EBITDA and a buyer pays $8.0 million, the multiple is 8.0x. Because price is earnings multiplied by the multiple, a change in earnings changes price by the size of the multiple, which is why earnings quality is negotiated so closely.
Multiples are driven by size, growth, margins, recurring revenue, customer concentration, sector and prevailing market conditions.
Price implied by each EBITDA measure
IllustrativeAlder Creek Manufacturing, $ millions
Common multiples
| Multiple | Typical use |
|---|---|
| Enterprise value / EBITDA | Most mid-sized private company transactions |
| Enterprise value / revenue | Fast-growing or not-yet-profitable companies, such as SaaS |
| Price / earnings | Listed companies |
| Price / SDE | Small owner-operated businesses |
Worked example
At 8.0x, reported EBITDA of $5.0 million implies a price of $40.0 million and adjusted EBITDA of $4.6 million implies $36.8 million. The $0.4 million difference in earnings becomes a $3.2 million difference in price.
Alder Creek Manufacturing, Inc. is a fictional company. All figures are illustrative.
Why it matters in a deal
The multiple scales every diligence finding. A small error in earnings becomes a large error in price.
Red flags
- A multiple applied to unadjusted or one-off earnings
- A multiple taken from much larger or faster-growing companies