EBITDA of 200,000 and a multiple of 5 give 1,000,000, but the shares are worth 780,000. Here is why.
Key findings
- Enterprise value = EBITDA × multiple. With 200,000 and an illustrative multiple of 5, 1,000,000.
- After 220,000 of net debt, the shares are worth 780,000.
- One point on the multiple changes the value by 200,000: that is why it is the heart of the negotiation.
Valuing with multiples
The most common way to put a first figure on a small business's value is to multiply its earnings by a multiple. The usual earnings measure is EBITDA: earnings before interest, tax, depreciation and amortisation. It measures what the business generates from its operations, regardless of how it is financed.
Enterprise value = EBITDA × multiple
An example with numbers
A hypothetical company with EBITDA of 200,000 and an illustrative multiple of 5 would be worth 1,000,000. That is the value of the business itself, as if it had no debt and no surplus cash.
To find what the shares are worth, which is what a seller receives, subtract financial debt and add surplus cash. With 300,000 of debt and 80,000 of cash, net debt is 220,000 and the shares are worth 780,000. Someone with half of them, 390,000.
How much the multiple matters
| Multiple | Enterprise value | Equity value |
|---|---|---|
| 4 | 800,000 | 580,000 |
| 5 | 1,000,000 | 780,000 |
| 6 | 1,200,000 | 980,000 |
One point more or less on the multiple changes the equity value by 200,000. That is why negotiations usually focus on the multiple and on which EBITDA is used.
What moves the multiple
There is no single multiple: it depends on the sector, size, growth, reliance on a few customers or on the owner, and market conditions. The multiples in this article are illustrative, not a market benchmark.
- They raise value: recurring revenue, diversified customers, a team that runs without the owner, steady growth.
- They lower it: reliance on one customer or person, uneven results, investment that is overdue.
Adjustments before multiplying
The EBITDA used is usually “normalised”: one-off costs or income are removed and, for example, the owner's pay is adjusted to what a manager would cost at market rates. A small adjustment to EBITDA, multiplied by 5, makes a big difference to the price.
For a real transaction, a professional valuation will also consider future cash flows and the specific terms. Make a first estimate with the business valuation calculator and check financial health with the financial ratios calculator.