EV/EBITDA Multiple

Full Definition

The EV/EBITDA multiple is the most widely used valuation metric in M&A and leveraged finance because it normalizes for differences in capital structure, tax rates, and non-cash accounting charges. By dividing total enterprise value by EBITDA, it expresses how many years of operating earnings an acquirer pays to own the business. A 10x multiple means the buyer pays ten times the company's annual EBITDA. Investment banks use EV/EBITDA multiples to benchmark transactions against comparable deals and public company trading multiples in every M&A fairness opinion and pitch book. Multiples vary significantly by sector, growth rate, recurring revenue quality, and market cycle. As of 2024, healthcare services businesses typically trade at 8–12x EBITDA, industrial manufacturers at 6–10x, B2B software companies at 12–20x, and high-growth SaaS at 15–30x or higher when using forward EBITDA. The premium for recurring revenue—SaaS ARR versus project-based services—is approximately 3–6 EBITDA multiple turns, reflecting the visibility and durability advantage of subscription cash flows versus transactional revenues. Buyers pay EV/EBITDA multiples based on their underwriting of forward EBITDA, not necessarily trailing EBITDA. A company acquired at "8x EBITDA" may be paying 12x trailing EBITDA if the buyer is crediting significant synergies or management growth plan projections in the denominator. This practice—buying on projected or synergized EBITDA—creates meaningful acquisition risk if the projected earnings fail to materialize. Quality buyers stress-test valuations at trailing EBITDA levels to ensure adequate return potential even in downside scenarios where forward projections are not achieved.

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