EBITDA or earnings before interest taxes depreciation and amortization is used to estimate cash flow, without any consideration being placed on the capitalization of the company, or the tax circumstances of the owners. It is also intended to reflect the cash flow of the company under new ownership. This allows sellers to addback any expenses that are exclusive to that owner. For example, if you have always paid your aunt a salary, but she does not have an operating roll within the company we can add-back her salary. EBITDA multiples are a method to calculate enterprise value (the value of the company). That is to say, you can multiply EBITDA by the EBITDA multiple to calculate the approximate value of the company. The number you multiply by EBITDA is the multiple. EBITDA multiples vary by industry, situation, location, etc. For example, it is not unheard of to have EBITDA multiples that exceed 20x in the technology or medical device industries. In other industries 1x to 2x is not unprecedented. In the auto center space multiples vary by franchisor, location, team and size. A few quick rules:
- Larger Companies = higher multiples
- Buyers believe that larger deals reflect lower total risk. More stores = more diversification, larger team = lower dependence on any one store, any one team member, etc.
- Larger Markets = higher multiples
- Stores in large cities trade for higher multiples than stores in smaller cities. Buyers assume there is more growth potential in larger markets
- Growing Companies = higher multiples
- Growth receives a premium, because buyers are purchasing a stream of cash flows, and buyers are assuming the company’s growth will lead to cash flow growth
The valuation for your company depends on both the enterprise value of your company and the value of the real estate (assuming you own the real estate). EBITDA multiples are used to calculate the value of the operating companies alone (assuming you have included an appropriate expense for the real estate). For our guidance on the appropriate multiple for your company feel free to give us a call or shoot us an email.