How investors view your business

Valuing a business using market EBITDA multiples – How investors view your business

In the standard process of acquiring a well-established and operating company, investors look primarily at the financial performance of the business, while taking into account growth potential (including many other factors). As it is already known, business owners struggle to objectively assess the value of their life’s work, so it is always a good idea to approach external advisors and experts who will “unemotionally” value the business as it stands and runs – of course, such an appraiser cannot do without the cooperation of the business owner or management. This is the only way to achieve the true value of the business.

  • Investors who want to get a relatively quick idea of the value of a company therefore use the valuation method using market EBITDA multiples.
  • EBITDA multiples are usually in the range of 2 to 6, but most often around 4. Conversely, in the case of technology or IT companies, the multiple can exceed 10.

And how does it actually work?

  • We determine EBITDA (earnings before interest, taxes, depreciation and amortisation).
  • We normalize EBITDA (we include effects that may distort the value of the company, most often low wages of owners who are involved in the day-to-day running of the company).
  • The next step is to multiply EBITDA by the appropriate multiple (Multiples must be supported in a full valuation, they cannot be “sucked” from the fingertips. Only with an indicative quick estimate can we derive a multiple off the top of our head).
  • In the last stage, we adjust the calculated value for liabilities (especially loans) and add the amount of funds as of the valuation date.

By following this procedure, we are able to form an idea of the true value of the business (business/operations), to which, in the case of property ownership, these and other assets need to be added. It is important to note, however, that the final price of a business is always determined by the market.

Below are some of the factors affecting the EBITDA multiple:

  1. Industry: different industries have different standards for EBITDA multiples. For example, technology companies typically have higher EBITDA multiples than traditional manufacturing companies.
  2. Business Size: Small and medium-sized businesses often have lower EBITDA multiples than large corporations. This may be due, for example, to the higher risks associated with smaller firms.
  3. Growth Prospects: Businesses with strong growth prospects may have higher EBITDA multiples than businesses with little growth potential. Investors are willing to pay a higher price for businesses that promise higher future profits.
  4. Market environment: Economic conditions and market trends can affect EBITDA multiples. For example, multiples may be higher during an economic boom than during a recession.

Each valuation method has its pros and cons, so businesses and their needs should always be approached individually.

Thinking about selling your business or valuation? Do not hesitate to contact us. More information HERE, or directly with our economic advisor Tomáše Ečera.

Other news

close ribbon