What decides which EBITDA multiple applies to a small business?

A multiple is a ratio applied to a measure of earnings. BDC files multiples under market-based valuation methods, which it says calculate a valuation by applying a valuation multiple, which may be based on EBITDA (earnings before interest, taxes, depreciation and amortization), revenue or other metrics. No single multiple applies to every small business, and this page explains what BDC says moves it. It is not a valuation of your business.

The factors BDC names

BDC says the specific figure used and the type of ratio vary depending on many factors, such as the industry and size of the company, market conditions and the multiples used to buy or sell comparable businesses. Its EBITDA glossary page adds that the specific multiple can vary depending on market conditions, industry and location. So if a multiple was quoted for another business, ask how that business compares with yours on each of those factors.

Why you cannot just apply one

BDC lists applying an inappropriate multiplier of EBITDA among the mistakes to avoid when determining a company’s value, and says plainly, “You can’t just apply a multiple.” If someone quotes you a multiple, ask what business it came from, what size it was and which earnings figure it was measured against. Our pages on why the same business can show two different EBITDA numbers and on SDE versus EBITDA explain why that last question matters.

A multiple is not the price

BDC says a valuator’s figure is just a guideline for how to approach negotiations in a sale. It says the final transaction price is often different and is influenced by many factors, for example your eagerness to sell, the buyer’s strategic interests or expected synergies, available financing, due diligence and the company’s capacity to move smoothly to new ownership.

Getting an independent view

Because of the complexity and the stakes, BDC says it is helpful to hire a chartered business valuator to get an objective picture of your company’s value or to judge whether a buyer’s offer is reasonable. The CBV Institute says chartered business valuators are recognized by regulatory, judicial and tax authorities, in Canada and internationally, as experts in business valuation. For market context, read what multiple small businesses sell for, and the EBITDA glossary entry.