An EBITDA valuation is the sum a buyer who will finance and tax the business differently from its owner does: adjusted EBITDA, the operating earnings with the add-backs in, times a multiple, plus the inventory and equipment at their agreed values. Valuing a business based on EBITDA rather than on seller's discretionary earnings is the convention once a business is large enough to have a manager who is not the owner, and the business valuation EBITDA multiple is the number the buyer enters, not one this hub publishes. This page works using EBITDA to value a company on the worked books from the EBITDA calculator page, says when EBITDA is the right earnings figure and when SDE is, and points at the free small business valuation tool on this site that does the sum from your own figures, with no account.
Valuation based on EBITDA: the formula and the worked books
Value equals adjusted EBITDA times the multiple you enter, plus inventory at cost and equipment at its agreed value. On the worked books, $180,000 of EBITDA with $50,000 of documented add-backs is $230,000 of adjusted EBITDA; at 2.5 the earnings value is $575,000, at 2.0 it is $460,000, at 3.0 it is $690,000, and $36,000 of inventory is added to each. The EBITDA business valuation calculator on this site shows the value at the entered multiple and the ones either side, and the report tool turns them into a range with a midpoint. The Financial Accounting Standards Board's standards, linked below, govern the statements the EBITDA is read from.
EBITDA business valuation or SDE valuation: which earnings figure
Seller's discretionary earnings add back the owner's whole salary, because the buyer of an owner-run business will take the owner's seat; adjusted EBITDA adds back only the salary above a market manager, because the buyer of a larger business will hire the manager. The same business therefore has a higher SDE than adjusted EBITDA, and the multiples the market applies to each differ accordingly, so a valuation that applies an EBITDA multiple to SDE overstates and the reverse understates. The rule the hub's tool follows is that the earnings figure and the multiple must be the same kind; the SDE page on this site works the other figure, and the Bureau of Labor Statistics' wage data is where the market manager's salary that separates the two is read.
The business valuation EBITDA multiple, as you apply it
The multiple carries everything the arithmetic does not: the growth, the customer concentration, the margin's trend, the management that stays, the size of the business and the buyer's cost of money. This hub publishes no EBITDA multiple for any trade or size, by rule, because a published multiple is an opinion signed by nobody, and the question is answered honestly only by entering the multiples the owner has evidence for and reading the range. The International Business Brokers Association is where the profession's own transaction reporting lives; the tool on this site applies whatever multiple is entered and shows what each half-turn of it is worth in dollars on the worked books, $115,000 per half-turn at $230,000 of adjusted EBITDA.
From the EBITDA company valuation to the deal
The EBITDA valuation is the enterprise value of the operation; the deal adds and subtracts from it: the inventory and equipment at agreed values, the working capital the buyer expects to find, the debt the seller clears or the buyer assumes, and the receivables kept or sold. A buyer's offer is usually stated on the enterprise value with those adjustments in a separate schedule, and an owner who has worked the EBITDA valuation and the adjustments separately reads the offer correctly. The free small business valuation tool on this site does the earnings and inventory lines; the paid plan files each valuation against the business and the date, and the Small Business Administration's guide to selling a business covers the deal from there.
Questions people ask about ebitda valuation
How do you value a company using EBITDA?
Adjusted EBITDA, the operating earnings with documented add-backs, times the multiple you enter, plus inventory and equipment at agreed values. $230,000 of adjusted EBITDA at 2.5 is $575,000 before the additions.
What EBITDA multiple should I use?
The hub publishes none. Enter the multiples you have evidence for and read the range; each half-turn of the multiple is worth $115,000 on $230,000 of adjusted EBITDA, which is why the evidence matters.
Should I use EBITDA or SDE?
SDE for an owner-run business whose buyer takes the owner's seat; adjusted EBITDA for a business large enough that the buyer hires a manager. The earnings figure and the multiple must be the same kind.