Often, we are asked about EBITDA Multiples – are they up or down, what is the applicable multiple for our company? And while we have a database of over 6,700 middle market aerospace and defense M&A transactions, we always advise our clients to be very suspect of EBITDA multiple valuations.
Since we founded our firm 22 years ago, we have seen repeatedly that the prices at which companies are bought and sold have less to do with EBITDA multiples and more to do with expected risk adjusted rates of return.
The following simple example proves this point:
$5 million in EBITDA last year and is going to breakeven next year and go bankrupt in 24 months. Using a 6x EBITDA Multiple, it is worth $30 million today. Using a risk adjusted rate of return, it has a value of $0.
$3 million in EBITDA last year and is going to experience annual growth of 15% for the next 5 years. Using a 6x Multiple, it is worth $18 million today. Using a risk adjusted rate of return, it is worth more than $30 million.
We maintain an EBITDA multiples database of more than 6,700 comparable deals because multiples are important. However, multiples are not the most important factor in the valuation of a middle-market aerospace and defense company. In our experience, with more than 60 transactions over the past 22 years, ‘Expected Risk Adjusted Rate of Return’ plays a more significant role than ‘EBITDA Multiples’ in determining price.
Have a great day everyone,