"What's the EBITDA multiple for my industry?" This is often the first question business owners ask when thinking about their company's value. While EBITDA multiples are a useful reference point, focusing solely on this metric is like judging a book by its thickness – you'll miss the real story.
Why EBITDA Alone Isn't Enough
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation) is popular because it's simple and comparable. However, it can mask critical factors that drive true business value:
Working Capital Requirements A business generating $1M EBITDA but requiring $2M in working capital to operate is less valuable than one needing only $500K. Your cash is tied up in inventory or receivables instead of generating returns.
Capital Expenditure Needs Two businesses with identical EBITDA can have vastly different value if one requires significant ongoing investment in equipment or technology. A services business with minimal CapEx needs may be worth more than a manufacturing business with the same EBITDA.
Growth Trajectory and Scalability A business growing 30% annually with a clear path to scale is typically worth more than a stable business with the same current EBITDA. Buyers pay for future potential, not just historical performance.
What Smart Buyers Actually Look At
Sophisticated buyers evaluate:
Customer Concentration: A business with one client representing 50% of revenue carries more risk than one with a diverse customer base
Quality of Revenue: Recurring revenue from subscriptions or long-term contracts is more valuable than project-based income
Market Position: Competitive advantages, barriers to entry, and market share trends
Team Strength: A business reliant on the owner versus one with a strong management team
Systems and Processes: Documented procedures and efficient operations that can survive ownership transition
Regulatory Landscape: Current compliance costs and potential regulatory changes that could impact future performance
Real-World Example
Recently, we valued two healthcare businesses with similar EBITDA:
Company A:
$2M EBITDA
70% client concentration
Owner-dependent
Basic systems
Stable but flat growth
Company B:
$2M EBITDA
Diverse client base
Strong management team
Advanced technology platform
25% annual growth
Despite identical EBITDA, Company B commanded a significantly higher valuation due to its superior business fundamentals and growth prospects.
The Cost of Getting It Wrong
Getting valuation wrong has real consequences. For sellers, overvaluing can leave you stuck in a lengthy, fruitless sale process, while undervaluing means leaving money on the table. For buyers, overvaluing leads to strained cash flow post-acquisition, while undervaluing means missing out on good opportunities to competitors. This is why looking beyond EBITDA isn't just about accuracy – it's about protecting your interests in a significant financial decision.
The Bottom Line
While EBITDA multiples provide a useful starting point, they shouldn't be the ending point. True business value lies in the quality of earnings, scalability of operations, and sustainability of competitive advantage.
Whether you're buying or selling, look beyond the simple multiple. Consider:
How sustainable is the current performance?
What investment is needed to maintain or grow the business?
How transferable are the key value drivers?
What risks could impact future performance?
Understanding these factors won't just help you arrive at a more accurate valuation – it will help you build a more valuable business.
About Zenify Investments
Zenify Investments is a boutique M&A advisory firm specialising in Australian SMEs. We bring big-firm expertise without the premium price tag, providing hands-on director-level support throughout every engagement. Whether you're considering buying, selling, or need a business valuation, we deliver sophisticated analysis with practical, actionable insights.
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