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How Is a Multiple Derived?

The primary valuation formula understood by nearly every participant in an M&A deal follows: Multiple X EBITDA. Additionally, many technology firms are valued as a multiple (not necessarily > 1) of revenue (sales).

EBITDA is earnings before interest, taxes, depreciation and amortization. It is generally recognized as the base number for computing value or the expected purchase price. Sellers make and support adjustments (add back "personal" expenses) to reflect the highest base to which is applied a multiple.

What factors are considered in deriving a multiple? The primary determinants are:

  1. Revenue size – the first level where multiples increase is about $15 million.
  1. The size and supportability of the adjusted EBTDA.
  1. The seller is clearly in a growth made, even though the multiple is applied to a trailing 12 months EBITDA.
  1. Industry or market niche of seller is "hot" for foreseeable future, especially if scalable.
  1. Private and public transactions in the prior 6-12 months which reflect ranges of multiples.
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