Blog: EBITDA Is Only One Piece to the M&A Valuation Puzzle

In the valuation of middle market companies, EBITDA is often the first number discussed when valuing a business—but it is only the starting point. Two companies generating the same EBITDA can have very different values depending on the quality and sustainability of those earnings, customer concentration, working capital requirements, capital expenditures, and how effectively EBITDA converts into cash flow.

Buyers will also look closely at how EBITDA was calculated. Are the proposed add-backs truly non-recurring? Are margins sustainable? Does the business require significant reinvestment to maintain its earnings? Are there customer, supplier or other operating risks that could affect future performance? A multiple applied to EBITDA may ultimately determine headline enterprise value, but the analysis underneath that EBITDA often determines the multiple, deal structure and whether the transaction gets completed.

For sellers considering an M&A transaction, understanding this distinction before going to market can be important. Reported EBITDA may start the valuation conversation, but the quality of the business behind that EBITDA ultimately drives the analysis.

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