How to Value a Business - Understanding EBITDA and Revenue Multiples
- Chris Johnsen
- Jul 25
- 6 min read
Updated: Sep 3
The first necessary step for business transactions involves determining the value of the company.
Business valuation serves as a fundamental requirement for both parties to establish fair expectations and reach effective agreements that lead to transaction success.
This article explains two popular quick valuation approaches which use EBITDA and revenue multiples by showing their application methods and specifying their appropriate use cases and multiple influencing factors.
Knowledge of these valuation methods will empower you to handle business appraisals with confidence and enhance your decision-making abilities.
The Importance of Business Valuation for Buyers and Sellers
Why Understanding Business Value Matters
The main advantage of business valuation understanding is that it enables informed decision making. Business value knowledge helps potential buyers prevent costly mistakes and business owners maintain fair market prices for their enterprises. Accurate valuations serve as an unbiased reference point for all parties to use during negotiations to avoid emotional pricing.
Building Strong Negotiating Power
The value of business valuation creates strong negotiating power. A defined valuation system creates an essential foundation for discussions which supports your initial offer and price negotiation. Real financial data enables buyers to defend their position and sellers can use their valuation models to support their price demands.
Valuation as a Tool for Strategic Planning
A well-established valuation provides tremendous advantages for strategic planning activities. An accurate valuation serves as a critical necessity for mergers and acquisitions as well as succession planning and capital raising purposes. The value of a business must be established by owners who want to develop their companies or exit because it directs essential choices about investments and partnership decisions.
Quick Valuation Approaches: An Overview
Multiple quick business valuation approaches exist but the most popular methods utilize earnings data and sales information.
The EBITDA Multiple Method
The EBITDA multiple represents one such method. The method calculates business value through Earnings Before Interest Taxes Depreciation and Amortization (EBITDA) multiplication.
The Revenue Multiple Method
Revenue multiples determine business value through a mathematical relationship between sales figures and revenue amounts. Companies without profitability can use this method effectively when they show both strong revenue growth or stable recurring income streams.
Other Common Valuation Techniques
The most widely used quick estimation methods in business valuation include EBITDA multiple and revenue multiple approaches among other methods like asset-based valuation and discounted cash flow (DCF) and market-based approaches. Early negotiations benefit from these methods as do business sales preparations before obtaining detailed valuation results.
The EBITDA Multiple: A Key to Operational Profitability
What Is EBITDA and How Is It Defined?
The acronym EBITDA represents Earnings Before Interest Taxes Depreciation and Amortization. Operating profitability measurement through EBITDA removes non-operational expenses and accounting adjustments from the calculation.
Why EBITDA Is a Preferred Metric for Comparison
EBITDA presents an unmodified view of business profitability because it omits non-operating expenses and accounting adjustments. EBITDA provides better industry comparison possibilities than net income because it ignores different depreciation methods and capital structure variations which affect net income.
A Simple EBITDA Calculation Example
The calculation of EBITDA begins with a $1 million net income followed by the addition of interest ($200,000) and taxes ($100,000) and depreciation ($150,000) and amortization ($50,000) amounts to obtain a total of $1.5 million. The calculated figure should receive industry-standard multiplication to produce a preliminary business value estimate.
The Revenue Multiple: Valuing Growth Over Profit
What Are Revenue Multiples?
The revenue multiple serves as an accepted business valuation technique. The business valuation approach calculates worth through the multiplication of revenue figures by established industry multipliers.
When to Use Revenue Multiples Over EBITDA
The method provides excellent value when EBITDA or net income does not reflect future business potential or shows instability or low profitability. Young or high-growth companies with low profitability or standard profit margins use revenue multiples to determine their business value.
The annual revenue of this business reaches $2 million. The business value based on a 1.0x multiple would amount to $2 million. This method serves as a basic tool for initial acquisition talks because it provides straightforward results.
How to Choose the Right Valuation Method
The selection between EBITDA multiple and revenue multiple depends on financial indicators of the business alongside its market sector.
When to Apply an EBITDA Multiple
The EBITDA multiple works best for businesses with profitable operations and consistent earnings stability. This method serves best to evaluate operational performance alongside efficiency levels. This method functions best for capital-intensive sectors including manufacturing and professional services.
When to Apply a Revenue Multiple
Use a revenue multiple for companies with unprofitable operations or unstable earnings patterns. The method delivers better results for assessing the worth of professional practices together with tech startups and businesses that show stable revenue but unpredictable profits.
The valuation multiples show substantial differences based on industrial sectors together with business dimensions and growth outlook and market conditions.
In 2025, small to medium-sized businesses received the following EBITDA multiples:
• Software and IT services: 6.1
• Manufacturing: 6.0
• Services: 5.2
• Gastronomy: 4.9
• Trade: 5.2
• Construction/Crafts: 4.8
The market value of revenue multiples differs between different industries. In 2024, they averaged:
• Advanced medical equipment: 5.25
• Online services: 6.01
• Legal services: 2.06
• Restaurants and bars: 2.69
• Manufacturing: 1.00
• Retail: 0.49
Organizations that generate continuous revenue streams or hold intellectual property rights tend to achieve superior valuation multiples.
Key Factors That Influence Valuation Multiples
The valuation multiples show substantial differences based on industrial sectors together with business dimensions and growth outlook and market conditions.
The value a business can obtain through EBITDA or revenue multiple depends on several elements:
Financial Performance and Growth Potential
Higher revenue and profit margins usually mean higher multiples. Fast-growing businesses often command higher valuations.
Industry Trends and Business Scale
Sectors like SaaS or healthcare often have premium multiples. Larger businesses tend to receive higher multiples due to lower risk.
Operational Efficiency and Market Conditions
Well-managed businesses with strong systems and low turnover are more valuable. Economic cycles and investor demand significantly affect multiples.
Quick “Back of the Napkin” Valuation Steps
Identify the right multiple using industry data.
Calculate EBITDA or revenue from financial statements.
Multiply your chosen figure by the relevant multiple.
Adjust based on company-specific factors such as brand, customer base, or risk profile.
Bringing It All Together: Beyond the Multiples
The Role of Professional Guidance in Valuation
A complete understanding of business valuation through EBITDA and revenue multiples proves necessary for those who want to buy or sell a company. Actual business value goes beyond quick estimates since numerous factors influence the true worth of a company. The process of accurate valuation along with transaction success requires professional legal and financial guidance.
Making Informed Decisions for Business Success
When you have more knowledge about your business you will be able to make better choices regarding your operations.
Frequently Asked Questions (FAQs)
Q: What is EBITDA, and why is it important in business valuation?
A: EBITDA represents the acronym that stands for Earnings Before Interest Taxes Depreciation and Amortization. The figure helps companies determine their fundamental profitability while enabling assessments between different business entities across various industries.
Q: Under what circumstances should I apply revenue multiple instead of EBITDA?
A: The revenue multiple provides better assessment for young businesses with fast growth and unprofitable operations as well as industries that show inconsistent profit margins.
Q: How do I find the right multiple for my business?
A: You can find the appropriate multiple by studying recent business sales within your industry and consulting with advisors and brokers for current market information.
Need help valuing your business? Our lawyers here at Johnsen Law offer trusted legal guidance for your business deal throughout every stage. Contact us today to get started.
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