EBITDA, Multiples, and Market Comparables: What Really Goes Into Valuing a Business?

When a business owner starts thinking about a sale, one of the first questions is almost always: "What multiple will my business get?" It’s a fair question—and an important one. But it’s often misunderstood. Multiples aren’t magic numbers. They’re shorthand tools buyers use to translate performance into price. And like any shorthand, they need context to be meaningful.

In this article, we’ll break down the real mechanics behind EBITDA, valuation multiples, and market comparables, what they mean, how they’re used, and what actually drives the value of a private company.

First Principles: What Buyers Are Actually Pricing

At its core, valuation is about future cash flow and risk. Buyers want to know how much cash your business will generate going forward and how confident they can be in those projections. While some buyers will build full discounted cash flow (DCF) models, most use faster methods, especially in the middle market.

There are three classic valuation approaches:

• Income Approach – based on discounted future earnings.
• Market Approach – based on comparing your business to similar ones.
• Asset Approach – based on the value of the underlying assets.

Multiples fall under the Market Approach—using the price others paid for similar businesses to estimate yours.

EBITDA, Explained in Plain English

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It's a rough proxy for operating cash flow, stripping out things that can vary widely between companies, like how much debt they have or how they handle taxes.

Adjusted EBITDA goes a step further. It normalizes the number to account for:

• Owner compensation above market
• One-time legal expenses
• PPP loan forgiveness or other non-recurring items

For example, if you paid yourself a $500,000 salary but a market replacement would cost $200,000, a buyer will likely adjust EBITDA upward by $300,000 to reflect normalized profit.

EBITDA is a preferred metric because it’s more comparable across different capital structures and tax situations, especially for private companies.

Enterprise Value vs. Equity Value: Why It Matters to Owners

Most buyers talk in terms of Enterprise Value (EV)—the value of the entire business, before factoring in debt or cash. To get from enterprise value to what the owner actually takes home (Equity Value), you use this bridge:

Enterprise Value - Debt + Cash = Equity Value

You’ll also see adjustments for "debt-like" items—customer deposits, deferred revenue, lease liabilities, etc.—which affect the final proceeds.

That’s why most private deals reference EV/EBITDA multiples, not price-to-earnings (P/E). EV/EBITDA removes distortions from capital structure.

What Is a "Multiple" and Which One Do Buyers Use?

A multiple is simply a ratio: Price / Financial Metric.

In private company M&A, the most common is EV/EBITDA. Others include:

• EV/Revenue: often used when EBITDA is negative or in early-stage, high-growth firms.
• Industry-specific multiples: for example, per-location revenue for franchises or per-customer revenue in SaaS.

The same business might yield different values depending on whether you’re using last-twelve-months (LTM) results or next-twelve-months (NTM) projections.

Market Comparables: Public Comps vs. Precedent Transactions

Valuation advisors use two main sources for comparables:

Public Comps – These are trading multiples of public companies in the same industry. They offer real-time data but may not reflect the realities of smaller, private firms. Public companies tend to be larger, better capitalized, and more liquid.

Precedent Transactions – These reflect actual prices paid in prior M&A deals. They’re often more relevant but can be dated or influenced by unique deal dynamics (like synergies or distressed sales).

Most advisors triangulate between these sources to determine a valuation range, then adjust based on your company’s specifics.

The Seven Levers That Move Your Multiple

Here are the core value drivers that impact your multiple:

Size and Scale

Larger businesses with more revenue and EBITDA often earn higher multiples. Buyers view scale as a sign of lower risk and better systems.

Growth and Visibility

Steady growth, especially with recurring or contractual revenue, boosts multiples. Conversely, high customer concentration or cyclical demand can pull them down.

Margin Quality

Higher and more stable gross and EBITDA margins increase confidence in future profitability.

Customer and Supplier Diversification

Diversified revenue and vendor bases reduce risk. A company with 50% of sales tied to one customer will likely see its value discounted

Capital Intensity and Capex Needs

If your business requires significant reinvestment to maintain earnings (e.g., new equipment every few years), that lowers the effective cash flow. EV/EBITDA may overstate value in these cases.

Working Capital Discipline

Businesses with volatile or seasonal working capital needs may face more scrutiny. Buyers look closely at working capital true-ups and pegs during diligence.

Management Depth and Transition Risk

Owner-dependent businesses fetch lower multiples. If you're the only one who can run things, buyers will factor in the risk of transition.

A Simple Walkthrough: From EBITDA to Purchase Price

Let’s say your business has:

• Adjusted EBITDA: $4 million
• Comparable EV/EBITDA multiples: 5.5x–6.5x

Step 1: Estimate Enterprise Value

$4 million x 6.0x = $24 million

Step 2: Adjust for Net Debt

• Debt: $3 million
• Cash: $1 million

$24M - $3M + $1M = $22 million Equity Value

Step 3: Consider Working Capital Peg and Other Adjustments

A $1M working capital shortfall could further reduce proceeds.

Step 4: Sensitize

If EBITDA drops by 10% or the multiple shifts to 5.5x, the enterprise value could drop by $2 million or more. This is why buyers want quality of earnings reports.

Myths and Pitfalls to Avoid

• “My friend got 8x” – Industry, size, and timing matter. Context beats anecdotes.
• Relying on P/E – This doesn’t reflect enterprise value or capital structure.
• Ignoring capex and working capital – EBITDA isn’t free cash flow.
• Assuming add-backs are automatic – Buyers scrutinize each one.
• More advisors = better price – Smart process design and fit matter more than numbers.

When EV/Revenue Makes Sense Instead

For early-stage or high-growth businesses, especially those with recurring revenue but negative EBITDA, revenue multiples can be appropriate. But even then, buyers are modeling future EBITDA.

Reach Out to Breneman Advisors

If you're thinking about a sale or recap in the next 6–24 months, it's not too early to start the conversation. At Breneman Advisors, we help Michigan business owners demystify valuation and prepare for strategic exits.

Explore our valuation services.

FAQs

How is EBITDA different from profit?
EBITDA strips out interest, taxes, depreciation, and amortization to approximate operating cash generation—it’s not net income or free cash flow.

Why do acquirers use EV/EBITDA instead of P/E for private companies?
Because it removes distortions from different capital structures and accounting choices.

What is a “good” multiple for my industry?
It depends on size, growth, margins, and deal timing. A range exists, but specifics drive the outcome.

What’s the difference between public comps and precedent transactions?
Public comps show trading levels; precedent transactions show what buyers actually paid. We use both.

Can I improve my multiple before going to market?
Yes. Improve reporting, reduce concentrations, and document processes. These steps increase buyer confidence and value.