Understanding EBITDA multiples

I’ve had a lot of conversations lately about EBITDA multiples. Generally, the question I receive is “What do you think about this multiple? Is it fair/reasonable/realistic?” Invariably I respond with something along the lines of:

“Sure, it seems generally reasonable. But did you consider…”

“Sure, but is that a forward multiple or a trailing multiple?”

“Sure, but how did you compute the multiple”.

The challenge with EBITDA multiples is they are general in nature, and almost always contain a myriad of assumptions. Furthermore, they can be easily manipulated to suit the party using the multiple. I think Warren Buffett says it best, “People who use EBITDA are either trying to con you or they’re conning themselves.” Charlie Munger, Buffett’s right hand man goes even further “I think that, every time you see the word EBITDA, you should substitute the word ‘BS’.” Strong words from one of the most successful businessman on the planet. Yet EBITDA continues to be the gold standard in which a company is evaluated. Continue reading Brad's column.

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