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What is the EBITDA Multiple in valuing businesses?

EBITDA Multiples represent the most common method used by corporate finance advisors, Private Equity and corporate acquirers for valuing businesses. The acronym specifically relates to Earnings Before Interest, Tax, Depreciation and Amortisation.  As a profit figure it is therefore independent of these features – independent of tax, independent of artificial accounting policies that relate to the balance sheet and independent of how the business is funded.  It therefore represents the clearest proxy for ‘operating cash-flow’ available for various parties to consider.

At this point it is important to note that Public Company valuations tend to relate to the P/E Ratio which is generally for the benefit of external shareholders and as such relates to post-tax earnings rather than pre-tax.

Example of EBITDA Multiples in use

Imagine a business turning over £10m, making a reported profit of say £500,000 under private ownership.  The starting point is to add-back all owners drawings, including any benefits that may stem from simply being a business owner – salary, pension contributions, benefits (cars, additional offices etc) – say £250,000.  Also add back any additional ‘exceptional’ costs from within the year that would not be expected to recur under new ownership – say £250,000.  The figure is then reduced by the commercial rate payable to an employed manager replacing the outgoing owners (eg £100,000), this gives an ‘adjusted net profit figure’.  A multiple is then applied and the total Enterprise Value is the resulting figure, in this case £7.2m.  However as a purchaser will reduce the value by any outstanding debt within the business and in our example we have a Term Loan of £600,000, the final Equity Value using EBITDA multiples approach is £6.6m.

EBITDA Multiples
EBITDA Multiples approach to valuation

An interesting anecdote is that if you take all private company transactions over the past 20 years with available data, the range of EBITDA multiples has averaged somewhere between 4 & 8.

Comments regarding the ‘EBITDA Multiples’ approach

The primary benefit of this approach is that it is simple.  As a method for comparing offers, it provides a framework upon which both sides can agree the raw data and agree the method.  What remains to negotiate is the multiple chosen by the buyer.

A note of caution when comparing EBITDA Multiples

Publically quoted multiples often cite the reported net profit figure and can rely on previous years numbers as these are all that the journalist could find at the time.  Taking our previous example if you were to reverse engineer the multiple based upon the reoprted profit of £500,000, the result would be 13.2 – partial information can undermine the usefulness of EBITDA multiples.

Your Business

If you would like us to provide guidance on potential EBITDA multiples for your particular business or a deeper analysis of this and other valuation parameters achieved on transactions in your sector please let us know and we will work out how best to help – in the first instance please email lawrence.price@rockworth.co.uk.

What our Clients say

  • Immense thanks to you both, Lawrence and Zuzana,for all of your hard work and trustworthy advice on this deal; your focus and patience have been incredible. I've been hugely impressed at all stages on how you've guided me through this process; and how you've kept cool heads when it must sometimes have been very challenging to do so. I'm really positive about the next stages. Extremely happy to recommend Rockworth.
    Andy Crysell
    Founder & CEO, Crowd DNA
  • Having been involved with the company for several years prior to the transaction, it was a very natural step for Lawrence and his team at Rockworth to lead the transaction with Investindustrial on behalf of the family shareholders. The key factors in the decision were to maintain absolute confidentiality so as to avoid disruption to the company that had been owned by the founding family for 110 years. Rockworth managed the sale process effectively, coordinating at times a very large number of advisors and negotiating all aspects of the deal alongside management and the shareholders. Rockworth also managed to keep to a tight timetable, agreeing the deal at Christmas and signing 2 months later in order to be able to announce the transaction at the Geneva motor show. The resulting transaction was as good as anyone could have hoped for and all involved are excited about Morgan’s prospects going forward.
    Dominic Riley
    Chairman, Morgan Motor Company
  • The Directors of GBCC were advised thoughout by Rockworth Management Partners whose market expertise enabled them to identify a number of potentially interested parties, of which Swan Mill Holdings became the purchaser.
    Chris Davies
    Finance Director, Great British Card Company
  • .. Thank you everyone at Rockworth for their guidance, advice and pragmatism during what has been a very quick turnaround. It has been a pleasure.
    Andy Whittard
    Managing Director, Cherwell Laboratories Limited
  • The Rockworth approach ensured that we were looking at companies we could be confident had a genuine interest in the transaction without revealing exactly who was looking.
    Jim O’Connor
    CEO, i2N
  • Rockworth provided the support, experience and the technical knowledge that we needed to secure a successful sale.  Lawrence and his colleagues are all high calibre individuals, and I would certainly recommend them.
    Alice Watson
    Founder, Porge Research
  • During the whole process the team at Rockworth were always available to answer questions, no matter how banal, and held our hand through the whole procedure... I can honestly say that without the Rockworth calm hand on the tiller I am not sure we would have got through it in such an easy manner.  
    David Bilton
    Director, CadCam Technologies Limited
  • Kittiwake Developments chose to work with Rockworth on the basis of their approach, networks and reputation.  Lawrence and his team provided excellent support throughout the entire sale process and enabled the company to achieve an outstanding result with the sale to Parker Hannifin. Whilst there was a great deal of complexity at times, it was managed with great care and my colleagues and I enjoyed working together with the Rockworth team throughout. I would have no hesitation in using Rockworth for future transactions and would recommend them very highly to others.
    Martin Lucas
    MD, Kittiwake Developments Ltd
  • Rockworth’s advice and guidance played a key role in the acquisition process at every step of the way – from creating the initial datasheet to the conclusion of final negotiations. In particular, the team’s exceptional support during due diligence was fundamental to meeting a very tight timeline that was just six weeks from formal offer to completion.
    Simon Flatt
    Founder, Pinnacle Marketing Ltd
  • I would like to thank you and the team for the major contribution you made in the sale of Cromptons Healthcare. It turned out to be a very complicated deal and I have to say I was staggered by the commitment and effort that was required from us all. I was impressed by both the professionalism and the support that Rockworth provided, which proved to be absolutely essential to me. I had not fully appreciated beforehand just how necessary that support would be.
    Martin Calhoun
    Owner, Cromptons Healthcare Ltd
  • Lawrence, many thanks to you and the members of the Rockworth team for achieving such a great result for us with the sale of Young Black to Indutrade. It is the best possible result we could have achieved, both for ourselves as shareholders, and for our staff, ensuring not just the continuation of the company, but positioning it for further growth through the development of our Max and Montana brands. We were very pleasantly surprised at the range of potential acquirers that William managed to introduce us to, and had no idea initially of the types of acquirer that you would manage to find from outside our direct industry. Yours and Zuzana’s thorough approach to Due Diligence was enormously helpful, and as I said before – a really impressive team effort from all involved.
    David Black
    Managing Director, Young Black IS Ltd
  • Rockworth was the ideal guide and partner in our search for a buyer for our company. Their process, insight and people skills were the perfect antidote for our inexperience and were a major factor in achieving the smooth path to our desired outcome. From the start their approach suited our needs as a privately owned company with limited resources to run the business and undertake a transaction. Particular features of their work included: the confidential, targeted development of contacts to generate a shortlist of worthwhile interested parties; the professional way they managed all phases of the process; their support for the development of presentation materials and answers to due diligence questions; and their communication and negotiation skills. They were invaluable in helping us understand what was needed and what we might reasonably expect. I cannot recommend them highly enough.
    Tim Champion
    Managing Director, H.Squared Electronics Limited
  • Thanks for the efforts of the Rockworth team in concluding what we hope will be a happy outcome and in particular we should thank you for being so persuasive regarding what a great investment KDL would be to external parties! No doubt we’ll continue to remain in touch particularly if we are chasing after local acquisitions.
    Andre Blackburn
    Owner, Kenure Developments Limited
  • I would like to thank Rockworth for their efforts in managing the deal process of our recent transaction: from initial preparatory work and advice through the deal process and to final completion, we found your work to be invaluable. I was particularly impressed with the careful and thorough management of the due-diligence process carried out by yourself and the team: the consistency and detail-oriented manner in which this work was carried out was much appreciated and ensured that the deal completed smoothly, even accounting for the different languages and countries that formed part of this transaction.
    Fabio Antoniazzi
    Founder, La Credenza Ltd
  • As a family owned business it was extremely important to us that we had an advisor who took real care and attention to the detail of our business which is in a niche market. Lawrence Price and his team demonstrated real commitment to the deal, both in researching appropriate potential acquirers and following this through in a diligent and extremely supportive manner. I know that without Lawrence and his team we wouldn’t have achieved the successful outcome that we did.
    Rachel Bush
    Owner, Bush & Company Rehabilitation Ltd

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