Understand the starting measure
EBITDA means earnings before interest, tax, depreciation and amortisation. It is an earnings measure, not cash available to a buyer or shareholder. A calculation should state the period and reconcile the starting figure to the underlying records. If the analysis uses adjusted EBITDA, each change needs an explanation and evidence rather than a label such as “one-off”.
Ask what supports the multiple
A multiple should be considered in the context of the business and the evidence used for comparison. Differences in customer concentration, revenue quality, scale, management dependency and growth assumptions can affect how useful a comparison is. An online sector average does not establish a suitable multiple for a specific private company. Record the source, date and relevant differences before treating a benchmark as applicable.
Work through an illustration, not a market quote
Suppose an example assumes £200,000 adjusted EBITDA and a hypothetical multiple of four. The arithmetic produces £800,000. Neither input is a recommendation or an available market price. Changing the earnings assumption to £150,000 with the same hypothetical multiple produces £600,000. That £200,000 difference shows why the earnings evidence deserves attention before debating only the multiple.
Follow the bridge to equity value
An enterprise-value calculation is not automatically the amount a shareholder receives. Debt, cash and the transaction’s working-capital arrangements may need consideration under the agreed basis and terms. Tax, fees, deferred payments and earn-out conditions are further questions. Label each stage of the calculation so an operating-business estimate is not confused with equity value or immediate sale proceeds.
Use more than a single shortcut
A valuation may need other approaches or checks depending on the business and purpose. Asset-heavy, loss-making or early-stage businesses can raise different questions from a mature business with stable trading. The engagement should explain the method, material assumptions and limitations. If you are using a calculator to prepare for a sale, treat its result as a discussion prompt and commission the appropriate work before relying on it.
Your starting checklist
- Reconcile reported and adjusted EBITDA.
- Ask for the evidence and limitations behind the multiple.
- Separate enterprise value, equity value and sale proceeds.
Questions before commissioning the work
Is EBITDA the same as cash flow?
No. EBITDA does not by itself capture working capital, capital expenditure, tax or financing cash movements.
Can I apply the example’s multiple to my business?
No. The multiple of four is a hypothetical teaching assumption, not a sector benchmark or valuation recommendation.
Further reading: British Business Bank: business valuation approaches.
General preparation information. Illustrations are not client cases or valuation opinions. Any work is subject to an agreed scope and intended use.