EBITDA Multiples for Trade Businesses
An EBITDA multiple is a single number that expresses the risk and growth in a business’s earnings: the lower the risk, the higher the multiple. It only means something when it is applied to the same earnings measure it was derived from, and multiples from listed companies, private equity deals or advertised businesses do not transfer to an owner-operated trade business. This guide gives no multiple ranges for trades, because a range quoted without evidence invites the wrong answer.
- A multiple expresses risk and growth in one number, and its inverse is the capitalisation rate.
- EBITDA, EBIT and seller’s discretionary earnings are different measures, and a multiple only works on the measure it was derived from.
- Multiples from listed companies and private equity transactions reflect size, liquidity and management depth that an owner-operated trade business usually lacks.
- Advertised asking prices are what sellers hope for, not evidence of what buyers paid.
- The same earnings can support very different values depending on customer concentration, owner dependency, contract quality and fleet condition.
What does an EBITDA multiple represent?
A multiple is a price expressed as a number of years of earnings. A business valued at $1,050,000 on EBITDA of $350,000 has been valued at 3.0 times. That single number carries a judgement about two things: how likely the earnings are to continue, and how fast they are likely to grow.
Its inverse is a capitalisation rate. A multiple of 3.0 corresponds to a rate of 33.3 per cent, because $350,000 is 33.3 per cent of $1,050,000. A buyer who pays 3.0 times is, in effect, requiring the earnings to return a third of the price each year, before tax and before any debt repayments. The lower the risk, the lower the return a buyer will accept, and so the higher the multiple.
Growth works the same way. A business with work already awarded and a pipeline that can be shown supports a higher multiple than one that is hoping for growth. In a trade business, growth also costs money: more vans, more licensed staff and more working capital. We test whether the growth is evidenced and what it would cost to deliver, because growth that needs a great deal of new capital is worth less than growth that does not.
A multiple is therefore an output of a valuation, not an input. It cannot be looked up. It is built from the evidence about the business in front of us, and the valuation should show how.
Which earnings does the multiple apply to?
This is where most mistakes happen. Three measures are in common use:
- EBITDA: earnings before interest, tax, depreciation and amortisation, after paying the owner a market wage for their work.
- EBIT: earnings after depreciation. It is the more careful measure where the business needs a lot of plant, because depreciation stands in for the cost of replacing it.
- Seller’s discretionary earnings: earnings before the owner’s pay and perks are deducted, so the profit available to one working owner. It is higher than EBITDA, and multiples applied to it are correspondingly lower.
Apply a quoted multiple to the wrong measure and you get the wrong answer, usually without noticing. The table takes one illustrative business and applies the same multiple of 3.0 to four measures.
| Earnings measure | Amount | At 3.0 times |
|---|---|---|
| EBIT | $244,000 | $732,000 |
| EBITDA, after the owner’s current pay of $100,000 | $300,000 | $900,000 |
| EBITDA, after a market wage of $120,000 for the owner’s role | $280,000 | $840,000 |
| Seller’s discretionary earnings, before the owner’s pay | $400,000 | $1,200,000 |
Built from net profit before tax of $230,000, interest of $14,000, depreciation of $56,000 and owner pay of $100,000. The multiple of 3.0 is chosen for illustration and is not a market figure.
The gap between the lowest and highest results is $468,000, and all four started from the same business and the same 3.0. The fix is to use the measure the multiple was derived from, and a valuation should state which one it uses. Our guide to how trade businesses are valued explains how the choice between EBITDA and EBIT is made.
EBITDA can flatter a business with heavy plant. It leaves out depreciation, and in an earthmoving, civil or landscaping business the machines wear out and must be replaced. Where the fleet is large, EBIT or EBITDA less a normal replacement allowance is the fairer base. Our guide on whether equipment adds to business value shows what happens when reported profit is capitalised without that adjustment.
One more point on what a multiple produces. Applied to maintainable earnings, it gives an enterprise value, the value of the operating business. It is not the price of the shares. Debt, surplus assets and working capital are adjusted afterwards to reach the value of the owner’s equity.
How does risk change the multiple?
Take one set of earnings and give it three different risk profiles. The table uses EBITDA of $350,000 and three multiples chosen for illustration.
| Risk profile | Illustrative multiple | Implied capitalisation rate | Value on $350,000 of EBITDA |
|---|---|---|---|
| Higher risk: concentrated customers, licence and relationships held by the owner | 2.0 times | 50.0% | $700,000 |
| Moderate risk: some contracted work and a modest management layer | 3.0 times | 33.3% | $1,050,000 |
| Lower risk: spread customers, documented contracts and a team that runs the work | 4.0 times | 25.0% | $1,400,000 |
The multiples are chosen for illustration only. They are not a market range, and real multiples depend on risk, growth and evidence. In a real valuation the gap between profiles could be narrower or wider.
The earnings are identical, and the values differ by $700,000 between the first and last rows. The difference comes from risk, not profit. That is why two trade businesses with the same EBITDA can be worth very different amounts, and why a valuation that does not explain its multiple is hard to rely on.
What moves a multiple up or down?
These are the factors we weigh most often in trade businesses. They interact: a strong point can offset a weak one, and a weak one can undo several strong ones. Factors that tend to support a higher multiple:
- recurring revenue from documented contracts with a history of renewal
- many customers, with no single customer or builder carrying a large share
- a management layer and systems that run the business without the owner
- earnings that have been steady or growing over several years, with evidence
- a fleet in good condition that needs no catch-up spending
- clean financial records that support the normalisations
Factors that tend to reduce it:
- heavy reliance on the owner’s labour, licence or relationships
- customer or builder concentration
- earnings that rest on one large project or one unusually good year
- ageing plant that needs replacing soon
- a shortage of licensed or skilled staff, or heavy reliance on subcontractors
- records that cannot support the earnings claimed
Size matters mainly through exposure. A business with small absolute earnings can be hurt more by a single loss, such as one key employee leaving or one customer ending, than a larger business with more depth. It is that exposure the multiple reflects, and we look for it in the records rather than assuming it from size alone.
Our guides on owner dependency and customer concentration look at two of the largest of these.
Why do listed-company and private equity multiples not transfer?
Because the businesses are different assets. A listed company is large, diversified, professionally managed, reports audited accounts and can be bought and sold in seconds. Businesses acquired by private equity investors are usually larger too, with a management team, better reporting and access to finance and growth capital. Each of those features affects the risk in the earnings, and so the multiple.
An owner-operated trade business usually has one owner, a concentrated customer base and informal systems, and a sale takes months and depends on a single buyer’s finance. A multiple derived from the larger businesses embeds a lower risk than the smaller one carries, so using it would usually overstate the value. The direction of the difference is clear. Its size is a matter for evidence about the specific business, not a figure to carry across.
Are advertised asking prices evidence of what businesses sell for?
No. An asking price is what a seller hopes to receive. It says nothing about whether the business sold, how long it took, what price was agreed or what was included.
Even when a sale does complete, the headline price is hard to compare. Before it could be treated as evidence, you would need to know:
- the earnings behind the price, and whether they were normalised
- what was included: stock, vehicles, plant, property or work in progress
- how the price was paid, including any part deferred or dependent on future results
- whether the seller stayed on after the sale, and for how long
- when the sale happened, and under what market conditions
Without those details, a price per dollar of profit is not comparable with anything, and they are rarely published.
Asking prices can tell a valuer something about what sellers expect. They tell us little about what buyers pay.
How is the multiple chosen in a valuation?
The valuer starts with the evidence about risk: the factors above, tested against the documents. The multiple is then built or checked from several angles: a build-up of the return a buyer would require, comparison with any reliable transaction evidence that exists, and cross-checks such as payback in years and the value implied above net tangible assets. The reasoning is written down so a reader can follow it and disagree with a specific step.
Two questions to ask of any quoted multiple
Which earnings measure was it applied to, and what evidence supports it for this business? If neither answer is given, the number cannot be relied on.
A good report states the earnings measure, the multiple, the capitalisation rate it implies and the reasons. To see how we approach the work, read how we value.
This guide is general information, not legal, taxation or financial advice. Examples are illustrative. The appropriate valuation approach depends on the circumstances and purpose of each engagement.