Revenue multiple vs EBITDA multiple

Both a revenue multiple and an EBITDA multiple turn one financial figure into a price for a business, so a buyer or seller can meet either in the same conversation. They apply to different parts of the income statement and leave out different things. BDC says market-based approaches calculate a valuation by applying a valuation multiple, which may be based on EBITDA, revenue or other metrics. This page sets out what each is applied to, what each ignores, and the questions to ask when one is quoted. It gives no multiple values, because the sources do not support any.

What a revenue multiple is

Revenue is the top line. BDC defines net revenue as the total income a business earns from sales after subtracting returns, allowances and discounts. A revenue multiple is a ratio of the value of a business to that figure. Because it starts from sales, it does not show what is left after the business pays its costs.

• Applied to: sales, before any cost of running the business.
• Shows: the scale of the business.
• Leaves out: whether the sales are profitable.

What an EBITDA multiple is

BDC says EBITDA is calculated by adding interest, taxes, depreciation and amortization back to net profit. The CBV Institute defines a multiple as a ratio of the value of a business or security to economic income or a non-financial metric, and lists EBITDA among its examples of economic income. That definition does not list revenue, so the CBV source supports the EBITDA side only.

• Applied to: earnings after operating expenses.
• Shows: profit before financing costs and non-cash items.
• Leaves out: interest, taxes and other costs, which BDC says EBITDA does not account for.

What each leaves out

BDC’s EBITDA margin is EBITDA divided by revenue, and BDC says it shows how much of each dollar of revenue is left after paying for operating expenses, excluding non-cash items and financing costs. A revenue figure alone does not show that share. BDC also observes that, because EBITDA adds back interest, amortization and depreciation, a company may have no net profit but high EBITDA. So neither figure is the whole picture. The EBITDA multiple answer explains the EBITDA side in more detail, and the revenue multiple glossary entry defines the other.

What decides the multiple

BDC says the specific figure and type of ratio vary greatly with factors that include industry and location, size and maturity, market conditions, the multiples used by comparable businesses, sales trends, the stability of earnings and cash flow, customer and supplier diversification, and dependence on owners and key employees. BDC lists failing to normalize earnings and applying an inappropriate EBITDA multiplier among valuation mistakes, and says valuators generally offer a price range that the company would probably sell for to an arm’s-length party, not one precise value.

Which fits depends on the facts

The factors below are conditions to check. They do not recommend a metric.

• If the business is profitable and its earnings are normalized, an earnings-based figure has something to measure; if not, ask what the figure is based on.
• If earnings and the customer base are stable and diversified, BDC lists that among the factors that move the multiple.
• If the business depends on its owner or key employees, BDC lists that too, and it affects either figure.
• If comparable businesses were priced on a particular metric, ask which one and how similar they are in industry and size.
• If a single multiple is quoted, ask how it was derived and whether it is really a range.
• If the figure is for a lender, a tax filing or a dispute, ask whether a credentialed valuator is needed.