CFO-CENTRIC

Professional Development
for Finance Leaders

OF COURSE,
ENTERPRISE
VALUE = EBITDA X
THE MULTIPLE…
UH, SO WHAT’S
LEARN. GROW.

THE MULTIPLE?
ENGAGE.

By: John O'Dore

 Of Course, Enterprise Value =
EBITDA x the Multiple… Uh, So
What’s the Multiple?
By: John O’Dore
---------------------------------
Multiples & The Market
Approach to Valuation
A business’ value is
generally based on the
present value of expected
future cash flows.
Unfortunately, forecasting these cash flow
streams can be difficult. The most common
method of valuation, the Market Approach,
derives a business’s value by looking at
transactions for businesses within the same
industry that are of similar size and
operational characteristics. In theory, this is
similar to how you might value your house,
except that there are a lot more variables
and comparable data is not readily
available.
A key metric that
is relied on with
the market
approach is
normalized
earnings before
interest, taxes, depreciation, and
amortization (EBITDA). This metric is used
to approximate historical cash flow and was
discussed in one of our previous articles.
This article addresses how Enterprise
Value/EBITDA multiples can be useful
indicators of market value for privately held
businesses.
Why are Multiples
Used?
The EV/EBITDA
multiple has been
the primary metric
used to evaluate
M&A deals since investors began using it for
leveraged buyout analysis in the 1980s. If
not applied properly, EV/EBITDA could lead
an owner to misunderstanding the value of
their business. The appropriate multiple is
predominantly a function of value creation,
growth, and risk.
John goes on to explain:
• Why multiples are used for valuing
middle market businesses
• How to make meaningful multiple
comparisons
• Considerations to deliberate when using
an EBITDA Multiple
Enjoy the full article here, Of Course,
Enterprise Value = EBITDA x the Multiple…
Uh, So What’s the Multiple?, and create
your Future.
Use CFO.University’s course, Introduction
to Mergers and Acquisition, to take your
M&A game to the next level.
John’s library on CFO.University is M&A
rich, as is Bryan Ducharme’s library. Enjoy
them as you grow.
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