The most common way to value an established, profitable business is to apply a multiple to its earnings. If someone tells you a business sold for “5x”, they almost certainly mean 5 times its annual EBITDA.
But getting the EBITDA figure right — and choosing the right multiple — is where most of the complexity lies.
What is EBITDA?
EBITDA stands for Earnings Before Interest, Tax, Depreciation and Amortisation. It represents the cash profit the business generates from its operations, before financing decisions and non-cash accounting charges.
Why EBITDA instead of net profit?
Net profit is affected by how the business is financed (interest), the owner’s tax structure (tax), and accounting policies (depreciation/amortisation). EBITDA strips these out to show the underlying operational earning power — which is what a buyer cares about.
How to Calculate Normalised EBITDA
Start with your net profit and add back:
- Interest — financing costs are specific to the current owner’s capital structure
- Tax — affected by entity structure and available deductions
- Depreciation & amortisation — non-cash charges
- Owner’s salary adjustment — if you pay yourself $50K but the role requires a $150K employee, deduct the difference. If you pay yourself $300K but the role only needs $150K, add back the excess
- Personal expenses — car, phone, travel, meals, entertainment run through the business
- One-off costs — legal disputes, restructuring, COVID impacts, equipment write-offs
- Related party adjustments — ensure transactions with related entities are at market rates
The result is your normalised EBITDA — the true earning power a buyer is purchasing.
Typical EBITDA Multiples
| Business Size (Revenue) | Typical EBITDA Multiple |
|---|---|
| Under $1M | 1.5x – 3x |
| $1M – $5M | 2.5x – 5x |
| $5M – $20M | 4x – 7x |
| $20M – $50M | 5x – 8x |
| Over $50M | 6x – 10x+ |
Size matters enormously. Larger businesses are more diversified, less risky, and accessible to a wider pool of buyers (including private equity), which drives competition and multiples.
Why the Same Profit Gets Different Multiples
Two businesses both earning $500K EBITDA might sell for $1.5M and $4M respectively. The multiple depends on:
- Growth trajectory — growing businesses get higher multiples
- Revenue predictability — recurring revenue vs one-off projects
- Customer diversification — broad base vs concentrated
- Owner dependency — runs without the owner vs owner is the business
- Industry — some industries inherently command higher multiples
- Quality of earnings — sustainable vs one-off or inflated
A Worked Example
| Item | Amount |
|---|---|
| Net profit (per accounts) | $280,000 |
| Add: Interest | $30,000 |
| Add: Depreciation | $45,000 |
| Add: Owner salary above market | $80,000 |
| Add: Personal car lease | $18,000 |
| Add: One-off legal costs | $25,000 |
| Normalised EBITDA | $478,000 |
Applied multiples (professional services, $3M revenue, growing):
- Conservative (4x): $1,912,000
- Mid-range (5.5x): $2,629,000
- Optimistic (7x): $3,346,000
Plus inventory at cost, plus surplus cash, minus debt = equity value.
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