And How is it Used?
February 2025
EBITDA is an acronym defined by the Corporate Finance Institute as “earnings before interest, taxes, depreciation and amortization”. It is a measure of cash flow that is often used by the investment community to determine the value of a business. As opposed to other measures of cash flow, such as net income, pretax income or gross cash flow, EBITDA aims to measure the core operations of a business. It achieves this by not considering debt levels, income taxes, levels of fixed assets or intangible assets. Although these things may need to be considered in the final value of a business, the use of EBITDA provides a less complicated means of determining that core value. It should be noted that the EBITDA used to value a business should exclude non-recurring items such as discontinued operations, one-time gains or losses and changes in accounting principles.
Most often the value of the business is expressed as a multiple of EBITDA. Although it is most often used when establishing the whole value of a business rather than a minority interest such as transactions in the stock market, it can be used to value minority interests, controlling interests and whole businesses as well. Since EBITDA is a measure of cash flow, the EBITDA margin (EBITDA divided by revenues) is a factor in determining the appropriate multiple of EBITDA used to value a business. Generally, a high EBITDA margin represents a more efficient business and vice versa. However, a business with a relatively high EBITDA margin doesn’t necessarily warrant a relatively high EBITDA multiple in that high profit margins are often an indication of higher risk of a competitor price-cutting and accepting a lower profit margin.
Since EBITDA represents cash flow before capital expenditures and needed capital expenditures can be quite large relative to cash flow, an alternative EBITDA measure is EBITDA less capital expenditures needed to maintain the level of EBITDA. Capital expenditures include purchases of equipment, furniture, fixtures and buildings. If capital expenditures are not considered the valuer risks the over-valuation of the business, especially if the subject business is in an industry that requires high levels of capital expenditures.
The application of EBITDA in order to value a business is relatively simple. The first step is to determine a level of EBITDA that is most representative of future EBITDA. Then, a multiple of EBITDA that is derived from the marketplace is applied, considering the multiples of businesses that are most comparable to the subject. Anything not considered in deriving the appropriate multiple of EBITDA should be considered in deriving the final value. For instance, if the desired business value is an equity value, then debt must be subtracted.
In order to get an idea of typical multiples of EBITDA that occur in the private market we looked to Pitchbook which reported an average buyout multiple of 11.4 in 2024, which was down from a multiple of 12.7 in 2021.
All in all, EBITDA is a measure of cash flow that is often used to determine the value of a business. However, business values derived via EBITDA don’t include some items that should be considered when determining a final value.
Relevant Court Cases
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Bullinger v. Sundog Interactive, Inc. et al.,
Supreme Court of North Dakota,
No. 20240188,
filed February 13, 2025
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Hollingsworth v. Hollingsworth,
Supreme Court of North Dakota,
No. 20240161,
filed January 9, 2025
Recent Business Valuation Articles
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“The Usefulness of EBITDA,”
by Erik T. Elfrink, Kurt H. Gee, Robert Hills
and Benjamin C. Whipple,
dated February 2025
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“Fair Value of Minority Shares in
a Closely-Held Company,”
by Jai Basrur, John Land and Jilnaught Wong,
posted February 11, 2025
Recent Engagements
- Valuation of the common
stock of a niche marine
facility on a minority
interest basis for stock
issuance purposes.
- Consulting regarding 100%
of the member interests of a
restaurant and bar on a controlling
interest basis for corporate
planning purposes.
- Valuation of the common stock of
a specialty retail company on a
minority interest basis for
gift tax reporting purposes.
- Valuation of 100% of the
common stock of an intellectual
property holding company on a
controlling interest basis for
purchase/sale purposes.
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