Business Valuation

Adjusted EBITDA

A common phrase in respect of business value is a “Multiple of Adjusted EBITDA”


Earnings Before Interest, Tax, Depreciation & Amortisation is a widely used profit related valuation method.
This effectively strips the profit back to a position that isn’t arbitrarily affected by asset depreciation or the burden of debt.

Adjusted EBITDA

This then needs to be “adjusted” which should include any “add-backs” as part of the “normalising adjustments” which will typically take into account of items such as:

  • Below fair market rates for sales, purchases or expenses
  • Owners salary or bonuses that are not at a fair market rate
  • Owners running of vehicles and other assets (we have seen sports cars and helicopters)
  • Repairs and maintenance charges that should have been capitalised
  • Non-recurring expenditure

So we are essentially getting to what a business will generate in order to service future debt.

EBITDA Multiples

A multiple is then applied to the “Adjusted EBITDA” figure, which will determine the Valuation for the business.  The EBITDA multiple in the valuation process is often based on an industry based average, calculated on a sample of transactional values and multiples of similar sized businesses sold. The multiplier figure for SME company valuations, is usually between 3 and 5.
Sometimes this can be higher if there are strategic reasons, or the business is in a specialist sector.

Whereabouts in this scale will depend on risk factors which will affect different businesses

Risk Factors that affect Value

When it comes to business value, “the lower the risk, the higher the value” and therefore, the following subjective aspects need to be taken into account:

  • Good second-tier management team in place
  • Not reliant on the business owner(s)
  • Blue-chip customer base
  • No one customer responsible for 10% or more of turnover
  • Recurring business
  • Contracts with Suppliers & Customers
  • Niche, growing market(s)
  • Difficult to replicate
  • Minimal competition
  • Good reputation within the market place
  • Steady year on year growth
  • Accreditations & Management Systems

It has always amused me that care is taken to accurately compute profit and adjusted ebitda, only to multiply by an arbitrary number.
But as I was told early on in my accountancy career – “Accountancy is an art and not a science”

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