EBITDA multiples: what they mean and what changes them

Valuation · 6 minute read

A multiple is not a property of an industry. It is a summary of how much risk a buyer sees in the earnings, and how confident they are that those earnings will still be there in three years.

What the multiple is really measuring

When someone says a sector trades at four to six times EBITDA, they are describing a distribution, not a rule. Where a particular business sits in that distribution — or outside it — depends on characteristics that have nothing to do with the sector code.

Two businesses can report the same £250,000 of EBITDA. One has three-year contracts with twelve local authorities, a registered manager who has been in post for six years and management accounts that reconcile. The other has one client representing half its revenue, an owner who holds every relationship personally, and accounts prepared once a year. They will not attract the same multiple, and no amount of negotiation changes that.

Factors that push the multiple up

• Recurring or contracted revenue with evidence of renewal
• A diversified customer base with no dominant account
• Management that will remain after the owner leaves
• Documented processes and systems that a new owner can run
• Clean compliance history in regulated activities
• Demonstrated pricing power and stable gross margins
• Cash conversion that matches reported profit

Factors that pull it down

• Customer concentration, particularly without contracts
• Owner dependency for sales, technical delivery or key relationships
• Earnings that have not been tested through a cost shock
• Deferred maintenance or capital expenditure the buyer will have to fund
• Weak records, unreconciled accounts or unresolved tax matters
• Contingent liabilities, disputes or employment issues
• Regulatory exposure the buyer cannot easily assess

Structure and multiple are connected

When a buyer cannot get comfortable with a risk, they rarely walk away immediately. They restructure. The headline multiple stays where the seller wanted it, but more of the consideration becomes deferred, contingent on retention of a key customer, or subject to an earn-out.

That is worth understanding before negotiating. A lower headline price paid entirely in cash at completion can be worth considerably more than a higher one with half of it contingent on events after you have left.

The practical implication

If a sale is one to two years away, the highest-return work is usually not growing earnings. It is reducing the handful of risks that are visibly constraining the multiple — the concentration, the owner dependency, the state of the records — because those change the factor applied to every pound of profit.