The 3 – 5 times EBITDA myth
A question disguised as a comment that business valuators often hear is: “My business is worth 3 to 5 times EBITDA, not so?” My response is always the same: “It depends” (on the specific circumstances, on the riskiness of the business, and many other factors). Not a great answer for people who want a quick reassurance that their hearsay is accurate but research into thousands of businesses that have sold across North America in the last 20+ years shows that the range in business values is considerably wider than 3 – 5 X EBITDA (earnings before interest, tax, depreciation and amortization). For businesses in construction, manufacturing, wholesale, retail and food services, 80% (or those with multiples between the 10 percentile and 90 percentile) selling prices can be as low as 1.5X EBITDA or as high as 20X EBITDA. Looking at a narrower range, for 50% (i.e. the 25 percentile to 75 percentile) of businesses in the same sectors, the range is about 2.5X to 10X. The median is 4.7.
All of which means that you may be selling yourself well short if you limit your asking price to 5X EBITDA.
A small investment in qualified and knowledgeable professional advice is highly recommended.