Is there any science behind the EBITDA "multiplier" in business valuations?- My Response
Above query the EBITDA multiplier was posted by Steve Swann on Financial Analysts and Modelers group on Linkedin.
I consider it to be very relevant and the responses were equally involving and seemed equivalent to reading several books before being able to comment on applicability of valuation methods. My response to the same is shared below.
Firm valuation should be arrived at using: a) Discounted Cash Flow method- a must since this is done post a detailed scrutiny of the business model of the firm b) Estimating cost of capital post factoring the leverage – to be used as discount rate. Cost of capital of similar firms should be calculated; deleveraged and then applied to the firm being valued factoring the firm-specific leverage ratio c) In case of a listed firm- take a comparable firm approach and use PE and EBITDA multiple as well d) The valuation figure derived from the above method works as a validation of the arrived valuation figure- variance of more than 20% may need to be explored in detail.
EBITDA multiple is also a useful method when firm is highly leveraged and will be 100% equity-owned post acquisition. So EBITDA multiple has a science behind it.