As overwhelming as it may seem to beginners — most especially — using the EBITDA Multiple formula proves to be incredibly helpful for any business. In this article, we’ve handpicked crucial information entrepreneurs must know about EBITDA, how to utilise it and make it work in your favour.
How can knowing your EBITDA Multiple help to secure investment in your business?
All investors want to know how much money they’ll make if they back you — that’s where the EBIDTA Multiple becomes a powerful tool.
In the early stages of a business, where there isn’t much hard data yet, tools like the EBITDA Multiple can help forecast your potential trajectory.
Investors want reassurance that they’ll receive a healthy return on the day-of-exit when your company is sold.
Even though your EBITDA Multiple won’t be a cast-iron guarantee of what your company will be worth when the time comes to exit, it will:
- Show your potential investor the current exit potential of businesses in your niche/sector.
- Demonstrate that you are financially literate, have a financial vision, and understand the end game you and your investor want to achieve. (In other words, you’re the perfect investable entrepreneur)
- Be a solid indicator that your pitch is on the right track and that the exit value you’re putting on your business is realistic.
What is the EBITDA Multiple?
In its simplest terms, the EBITDA Multiple is how most start-up founders calculate their potential exit. It’s based on the formula Valuation = EBITDA x Multiple, where Multiple is a variable figure determined by the current value of the exit deals secured by other businesses in your industry. Your Multiple will also be influenced by the amount of tangible and intangible assets in your company.
Your EBITDA is your earnings before interest, taxes, depreciation, and amortisation. Sometimes, instead of EBITDA, founders will use a revenue multiple, where revenue is multiplied by an industry ‘revenue multiple’.