Valuing with multiples: EV/EBITDA and the like

Multiples are the most widely used valuation method in M&A and private equity practice, because they answer a simple question: how much are the market and buyers paying today for companies like yours? The idea is to compare a company’s value with a reference economic figure — often EBITDA — and apply the ratio observed in comparable transactions or companies. It is a quick, communicative method, but it must be used with judgement: a poorly chosen multiple leads to an off-target valuation.

What EV/EBITDA is

The most used multiple is EV/EBITDA: the ratio between Enterprise Value and EBITDA (earnings before interest, taxes, depreciation and amortisation). EBITDA approximates the activity’s capacity to generate cash from operations, before financing choices and amortisation policy.

Beware of a point that confuses many: the multiple is applied to the Enterprise Value, not directly to the price of the shares. To move from EV to equity value (what the shareholder actually receives), the net financial position is subtracted:

Equity value = Enterprise Value − financial debt + cash

A company with EBITDA of CHF 1 million and a 6x multiple has an EV of CHF 6 million. If it has CHF 1.5 million of debt and CHF 0.3 million of cash, the value of the shares is about CHF 4.8 million. Ignoring this step is the most frequent and most costly mistake.

The other useful multiples

EV/EBIT: as above but on EBIT (after depreciation and amortisation). Useful when investments in fixed assets weigh heavily and EBITDA overstates the real capacity to generate cash.
EV/Revenue (Sales): used when the company does not yet have stable margins — scale-ups, growing software, businesses in temporary loss. Less reliable, because two companies with the same revenue can have opposite profitability.
P/E (Price/Earnings): the ratio between price and net profit. Common for listed companies, less so for SMEs, because net profit is affected by specific tax and financing choices.

Where multiples come from

A multiple is not made up: it is drawn from real references.

Comparable transactions: prices paid in recent deals involving companies in the same sector and of the same size.
Comparable listed companies: stock-market multiples of similar businesses, usually discounted for unlisted SMEs (less liquid, riskier, more dependent on the entrepreneur).

For a Swiss SME the real multiples are often lower than the press suggests when reporting on big deals: much depends on sector, size, growth and dependence on the owner.

Normalising EBITDA: the decisive step

A multiple is only worth as much as the base it is applied to. Before multiplying, EBITDA must be normalised: non-recurring or non-market items are stripped out to obtain the real, repeatable profitability.

Owner’s or family members’ salaries out of line with the market (too high or too low).
Private costs run through the company (cars, travel, non-operating real estate).
One-off revenue or costs (litigation, extraordinary sales, exceptional grants).
Rents between related parties on non-market terms.

In a family-controlled SME these adjustments can shift EBITDA — and therefore the price — substantially.

What raises and what lowers the multiple

Raise it: solid growth, recurring revenue, high margins, diversified customer base, low dependence on the owner, a defensible market position.
Lower it: concentration on a few customers, a company that revolves entirely around the entrepreneur, volatile margins, a declining sector, poorly transparent accounting.

The limits to keep in mind

Multiples photograph the past and assume it is representative of the future: for a rapidly changing company they are less reliable. They do not capture the financial structure or the investments needed to sustain the business. That is why, in practice, the multiples method is paired with DCF (which values future cash flows): two different routes that, cross-checked, return a reasonable value range instead of a single flat number.

In summary

EV/EBITDA measures how much the market pays for similar companies; it is quick but must be calibrated.
The multiple gives the Enterprise Value: for the share price, subtract net debt.
Always normalise EBITDA before multiplying.
The right multiple depends on sector, size, growth and dependence on the owner.
Use multiples together with DCF to obtain a range, not a single value.

How we help you

We build credible valuations for Swiss SMEs and entrepreneurs: EBITDA normalisation, choice of comparables, the bridge from Enterprise Value to equity value and comparison with DCF. A defensible number, ready for the negotiation. Let’s talk about your valuation.