As discussed in a previous newsletter, EBITDA is a widely used proxy for the cash flow of a business and as a valuation metric for comparing businesses. Non-cash items such as depreciation/amortization, along with income statement expenses of interest and corporate taxes, are added back to net income to arrive at EBITDA.
Consistent and growing EBITDA along with the size premium are again driving valuation multiples in private equity transactions. Private equity transactions greater than $100 million were valued under 8.0x EBITDA for three consecutive quarters, finally rebounding in Q2-2021 to the multiple range that was transacted prior to the onset of the Covid pandemic. Valuation multiples on a whole have re-aligned to where they are expected to be with size premiums falling back in line with historical premiums.
EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization, it is a widely used proxy for a business’s cash flow and when multiplied by EBITDA market multiple, can determine the market valuation of a business.
Using EBITDA for valuation purposes, non-cash income statement items such as depreciation/amortization, along with interest expenses and corporate taxes, are added back to the net income to calculate EBITDA. EBITDA allows for the comparison of companies without the concern of different types of capital structures (lower versus higher levels of debt), differing tax rates or varying depreciation schedules on capital assets.
In private equity transactions under $250 million, EBITDA enterprise valuation multiples increased from 6.7x to 7.0x EBITDA, an increase of 4.5% from last quarter. As the current EBITDA multiples are compared to historics, multiples have rebounded in the $25-$100 million deal range to near two-year averages, as deals from $100-$250 million are lagging pre-pandemic valuations. When comparing EBITDA multiples to the entire dataset, multiples of transactions in the $25-$100 million range are well above the long-term multiples.