EBITDA multiples explained for private businesses

What EBITDA measures, and what it leaves out

EBITDA stands for earnings before interest, tax, depreciation and amortisation. It starts with the profit from running the business and strips out four things: the cost of borrowing, income tax, and the accounting charges that spread the cost of equipment and intangible assets over time.

The reason buyers and valuers like it is comparison. Two cafes with the same trading performance can report very different profits because one has a bank loan and the other does not, or because one bought its fit-out last year and the other ten years ago. EBITDA puts them on a closer footing, so the conversation can focus on how the business actually trades.

What EBITDA leaves out matters too. Depreciation is an accounting entry, but equipment still wears out. A transport business that replaces a truck every few years has a real, recurring cost that EBITDA ignores. A good valuation keeps that cost in view, through a lower multiple, by working from earnings after depreciation (EBIT), or by checking the cash left after reinvestment.

How the calculation works

The method has three steps. First, work out the EBITDA the business can be expected to keep earning, often called maintainable EBITDA. Second, choose a multiple that reflects the risk and growth of those earnings. Multiplying the two gives the enterprise value: the value of the operating business, before thinking about how it is funded.

Third, move from enterprise value to the value of what you own. Interest-bearing debt (and lease liabilities, if rent is left out of EBITDA) is subtracted, and cash the business does not need to trade is added. Unusually high or low stock and debtors may also be adjusted. What is left is the value of the equity, which is usually the question an owner or tax adviser is asking.

In the example, the adjustments changed the value by four times their own size before anyone debated the multiple. The earnings figure deserves as much attention as the multiple itself.

Normalising the earnings

Private business accounts are prepared for tax and for the owners, not for a buyer. Normalising adjusts them to show what a new owner, running the business at arm's length, could expect to earn.

Each adjustment needs evidence. A valuer will ask for payroll records, the lease, invoices for the one-off items and an explanation of anything unusual. Adjustments that cannot be supported tend to be challenged, by a buyer in a sale or by the ATO in a tax matter.

Leases need particular care. Depending on how the accounts are prepared, rent can appear as an ordinary expense, or it can be split into depreciation and interest under the accounting standard for leases. The second approach lifts EBITDA without changing the business at all. What matters is consistency: the earnings and the multiple must be measured the same way.

Where a multiple comes from

A multiple is not looked up in a table. It is derived, and there are three usual sources. A careful valuation often uses more than one and explains why the final figure sits where it does.

1. 01Comparable private salesPrices paid for similar private businesses, divided by their earnings. The difficulty is that private deal data is patchy, earnings definitions vary, and the price may include stock, property or deferred payments that change the true multiple.
2. 02Listed company dataMultiples implied by the share prices of listed companies in the same sector. Listed companies are larger, more diversified and easy to sell, so a small private business usually warrants a reduction, with the reasons written down.
3. 03A required rate of returnA multiple is the flip side of a capitalisation rate (the return a buyer wants, less expected long-term growth) applied to the same measure of earnings. A business where a buyer wants a high return to compensate for risk has a high capitalisation rate and a low multiple.

What moves the multiple up or down

Because a multiple summarises risk and growth, anything that makes future earnings more certain tends to lift it, and anything that makes them fragile tends to lower it. The factors a valuer weighs usually include:

• Owner dependence: whether customers, suppliers and staff stay if the owner steps back.
• Customer concentration: how much revenue relies on one or two customers.
• Recurring revenue: contracts, subscriptions or repeat work compared with one-off jobs.
• Size: smaller businesses generally carry more risk per dollar of earnings.
• Staff and systems: a capable second tier and documented processes.
• Quality of records: clean, timely accounts make earnings easier to rely on.
• Industry conditions: competition and the outlook for demand.
• Capital needs: how much must be reinvested each year to keep earnings steady.

Two businesses with identical EBITDA can justify quite different multiples, and the reasons should be visible in the report.

Common mistakes with multiples

1. Applying a multiple to reported profit without normalising it first.
2. Mixing definitions, such as a multiple based on earnings after owner wages applied to earnings before them.
3. Forgetting to subtract debt, which turns an enterprise value into an overstated price for the shares.
4. Using a single peak year as if it will repeat.
5. Treating a broker's asking price or a friend's sale as evidence of market value.
6. Applying a listed company multiple to a small owner-run business without adjustment.
7. Valuing a part interest as a simple fraction of the whole, when a minority holding may be worth less per share.

Most of these errors push the value up, until a buyer, an adviser or the ATO looks closely.

Multiples in a valuation for tax purposes

For tax purposes, the ATO generally judges a valuation by the process behind it: a suitably qualified and objective valuer, a recognised method, and credible evidence that someone else could follow. The ATO may review any valuation, and the taxpayer remains responsible for the figure used. An EBITDA multiple is a recognised approach for many trading businesses, but it carries weight only when the earnings adjustments and the choice of multiple are explained and supported.

This matters for the capital gains tax changes that start on 1 July 2027. For Australian resident individuals, and trusts with at least one eligible beneficiary, the law generally treats relevant assets as sold and reacquired at market value just before that date, which makes 30 June 2027 the valuation date where a valuation is used. Not everyone affected by the changes needs a valuation: an apportioning method may be an option once one is made, and a company’s own post-CGT assets are outside this rule (pre-CGT assets have their own reset). Your tax adviser decides which approach suits you.

How we use multiples at Independent Business Valuation

At Independent Business Valuation, a suitably qualified business valuer at Valuo decides the method for each engagement. For a trading business with steady earnings, a capitalisation of earnings approach is often the main method, cross-checked against another such as net assets. An early-stage or loss-making business may suit a different method. The report sets out the earnings adjustments, the evidence for the multiple, and the step from enterprise value to the interest being valued.

We charge one fixed fee of $999 + GST for a full valuation report on one business or ownership interest with annual turnover under $10 million. Larger or more complex matters are quoted in writing. The fixed fee applies once we confirm the interest, purpose, structure and records fit the fixed-fee scope. Anything outside it is quoted in writing before we start. Fixed fee, confirmed in writing before we start. No hourly billing and no surprises.