EBITDA Multiples by Industry

EBITDA Multiples by Industry

Determining the multiple of EBITDA (by industry) to use for company valuation can be a challenging and debated decision. There are many attributes that factor into choosing an EBITDA multiple, with one of the most influential aspects being the industry in which the valuated business operates. This is primarily due to future growth considerations. For instance, high tech businesses will typically be valued at higher EBITDA multiples than manufacturing businesses because of growth potential.

Other Factors that Influence EBITDA Multiples

However, there are many other factors that influence EBITDA multiples other than industry growth prospects. Risk vs. return is always a factor. The size of the business and the level of EBITDA itself plays a huge part in selecting an EBITDA multiple, with the general perception that investments in larger businesses have less risk. (For a chart of multiples for smaller businesses, read How Small Businesses Are Valued Based on Seller's Discretionary Earnings (SDE)).

The current economic climate, including the availability of financing, can have a considerable effect on EBITDA multiples, which will increase in a positive economic environment with low interest rates. Businesses that require a lot of working capital or significant investments in capital expenditures will earn lower EBITDA multiples.

For more on this subject you can check out a more complete post here: how to value a small business for sale

EBITDA Multiples by Industry

Nevertheless, when valuing a business, it is essential to consider the effect on EBITDA multiples of the industry in which the business operates.” For most businesses with EBITDA of $1,000,000 - $10,000,000, the EBITDA multiple will be in the general range of 4.0x to 6.5x, increasing as EBITDA increases. However, due to growth prospects, high tech and healthcare/biotech firms tend to earn EBITDA multiples for their industry above this average norm. Meanwhile, construction and engineering firms often have EBITDA multiples for their industry below this norm.

The 2015 Capital Markets Report produced by the Pepperdine Private Capital Markets Project (on page 9) displays a chart showing EBITDA multiples by industry and by the size of EBITDA itself. The range of EBITDA multiples (for EBITDA between $1,000,000 and $10,000,000) is 3.3x to 8x, with the averages ranging from 4.5x to 6.5x. Following is a portion of the Pepperdine chart with the axis reversed to enable easier viewing of the effect of the size of EBITDA itself:

Other Articles Explaining Earnings Multiples

However, smaller businesses, which are typically run by an owner/operator, are usually valued as a multiple of Seller’s Discretionary Earnings (SDE) rather than EBITDA.  The How to Sell a Business Newsletter Series on this website helps explain how to value a business using multiples of SDE, EBITDA or Adjusted EBITDA. We strongly encourage you to read the six articles mentioned in the section below.