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1)      The EBITDA multiple

The EBITDA multiple of company X is defined by m = Enterprise Value / EBIDTA (where the enterprise value is taken at the end of year n, and EBITDA is for year n). In other words, it represents how many times its EBITDA the company is worth.

At this stage, it is important for you to understand that EBITDA is an accounting number, while the Enterprise Value is a market value. By “market value” we can mean either of the two notions, depending on the context”:

-          the market value determined by the stock market if company X is listed, i.e. the total number of shares in circulation multiplied by the current quote for your company’s stock. This value can be observed only if company X is listed (when using such a value the EBITDA multiple will be called a “market multiple”)

-          the value at which company X has been sold to an investor (when using such a value the EBITDA multiple will be called a “transaction multiple”)

Be aware of the fact that market multiples and transaction multiples do not measure exactly the same thing; indeed, the market multiple consider that company X is operating on a standalone basis, while the transaction multiple may hide the fact that company X has been sold to an industrial investor who owns a company Y that is expected to realize industrial synergies when operating alongside X. In this way, a premium might have been paid to the seller of X (in order to share the anticipated synergies) and the transaction multiple of X might thus be a little higher than its market multiple (if it exists).

Keeping this in mind, the idea of the EBITDA multiple method is to compute the multiples of comparable companies (in terms of the industry they are operating within) and come up with a benchmark multiple m* (not necessarily an average of the calculated multiples, but a number which seems reasonable with respect to these; for instance, one might decide to eliminate from the sample extreme values which might represent aberrations). The value of company X is then given by:

Enterprise value of X = m* x EBITDA_X, and its market value of equity by:

Market value of equity = m* x EBITDA_X – Market value of debt.