Multiples of earnings before interest, tax, depreciation, and amortization (EBITDA) are used to compare acquisition valuations across many industries, including the aerospace and defense industry (“A&D”).
We are often asked by prospective clients what they should expect for a “Multiple”, which is shorthand for the valuation multiple of EBITDA as reported over the trailing twelve months, as may be adjusted (which is a topic for a future Deal Note®). We maintain a large database of transactions in the middle market of the aerospace and defense industry and can provide comparable multiples across any subsector of A&D.
However, as we always tell our clients, whatever EBITDA Multiple might be applicable to your specific business at any given time in the market, it is not the most important driver of your value. Rather, as the table below clearly shows, the most important variable in your valuation is your EBITDA Margin. In the examples below, showing five companies with $40 million in revenue, we have applied a low “6 Multiple” in the first column and a high “10 Multiple” in the last column. And yet, the transaction in the first column has a value that is three times that of the transaction in the last column.
| ($Millions) Value | $60 | $56 | $48 | $36 | $20 |
|---|
| Revenue | $40 | $40 | $40 | $40 | $40 |
| EBITDA Margin | 25% | 20% | 15% | 10% | 5% |
| EBITDA | $10 | $8 | $6 | $4 | $2 |
| EBITDA Multiple | 6 | 7 | 8 | 9 | 10 |
Thus, while EBITDA Multiples are important and we are glad to share our database with all prospective clients, we encourage our clients to focus on their EBITDA Margins, and not EBITDA Multiples, when they are seeking to maximize value.
Have a great day everyone.
Ryan Kirby
Vice President
