Step-by-Step Guide to Applying EBITDA Multiple Valuation +  Free Excel Templates

2 Excel templates:

1) Matching Trial Balance and CoA

The CoA sheet contains the chart of accounts with mapping.

Columns:

𝗖𝗵𝗮𝗿𝘁 𝗼𝗳 𝗔𝗰𝗰𝗼𝘂𝗻𝘁𝘀 – The list of GL accounts

𝗚𝗿𝗼𝘂𝗽 – most important because it is used in all subsequent sheets, and reports

𝗗𝗲𝗯𝗶𝘁/𝗖𝗿𝗲𝗱𝗶𝘁 – Indicates whether the account is debited or credited

𝗣𝗼𝘀𝗶𝘁𝗶𝗼𝗻 – Specifies the financial statement position it belongs to.

The key here is to have more automated reporting.

The idea here is :

👉 Input your trial balance in Data input sheet

👉 Insert groups by =VLOOKUP formula

👉 SUM groups into financial statements

I’ve pasted data here as examples for all months starting from January 31, 2024, to December 31, 2024.

​Click here to get your Excel template​

The model can be adjusted very easily to any company. This template is resulted by a full reporting package, forecasting files and schedules. I do not share such templates this time, I focus just on the importance of presentation.

2) Startup Valuation Models​​

7 methods included with the explanation of when the method is appropriate to use and valuation calculation under given assumptions:

Discounted cash flow method

Valuation by multiple (EBITDA or Revenue/ARR)

Comparable companies method

Replacement cost method

Net book value method

Berkus method

Venture capital method

​Click here to get your Excel template​

This model, with small adjustments can be used for many industries.

Here are 2 Infographics for Today:

1) Finance Model Design​​

​Get this infographic on a high-resolution PDF​​​​​​​​​​​​​

2) How to Maximize the Value of Your Company

​​​Get this infographic on a high-resolution PDF​​​​​​​​​​​

Here’s today’s “How to” guide:​​​​

Step-by-Step Guide to Applying EBITDA Multiple Valuation

1. Determine EBITDA as it is

• EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is a measure of a company’s operating performance and profitability.

Example:

• Revenue: $10 million
• COGS: $5 million
• SG&A: $1 million
• Depreciation: $0.5 million
• Interest: $0.2 million
• Taxes: $0.3 million

EBITDA = Revenue – COGS – SG&A = $10 million – $5 million – $1 million = $4 million

2. Make EBITDA Adjustments

EBITDA may need adjustments to reflect the true operating performance of the business, especially in private equity deals. The adjustments can be one-time, non-recurring expenses or revenue items.

• One-time expenses: These are expenses that won’t recur in the future (e.g., legal fees, restructuring costs).
• Owner compensation: If the business is owner-operated, the salary taken by the owner may not reflect the market rate for someone in that position.
• Non-core operations: Revenue or expenses related to activities not part of the core operations should be adjusted.

Example:

• EBITDA (before adjustments): $4 million
• Adjustment for non-recurring legal fees: $0.1 million
• Adjustment for owner’s compensation (over market rate): $0.2 million

Adjusted EBITDA = $4 million + $0.1 million + $0.2 million = $4.3 million

3. Apply EBITDA Multiple

Once you have the adjusted EBITDA, apply an industry-specific multiple to determine the enterprise value (EV). The multiple is often based on comparable companies or precedent transactions in the industry.

Example:

• EBITDA Multiple: 6x
• Adjusted EBITDA: $4.3 million

Enterprise Value = 6 × $4.3 million = $25.8 million

4. Adjust for Net Debt

To arrive at the equity value, subtract the company’s net debt from the enterprise value.

Example:

• Enterprise Value: $25.8 million
• Debt: $5 million
• Cash: $2 million

Net Debt = Debt – Cash = $5 million – $2 million = $3 million

Equity Value = Enterprise Value – Net Debt = $25.8 million – $3 million = $22.8 million

5. Adjust for Working Capital

If net working capital (NWC) differs from a normalized level (target NWC), an adjustment will be made to equity value. Working capital adjustments ensure the business has sufficient cash to operate post-transaction.

Example:

• Target NWC: $1 million
• Actual NWC: $0.8 million

NWC Adjustment = $1 million – $0.8 million = $0.2 million

Adjusted Equity Value = $22.8 million – $0.2 million = $22.6 million

6. Consider Other Adjustments

Adjustments might also be made for items like:

• Deferred revenue
• Accrued expenses
• Off-balance sheet liabilities

Step-by-Step for Transaction Structuring with Contingent Payments

In many private equity transactions, a portion of the purchase price is contingent on future performance. Let’s assume the transaction is structured so that 50% of the price is paid upfront, and 50% is contingent on hitting future EBITDA targets after one year.

1. Initial Purchase Price

The initial purchase price is typically based on the current valuation.

Example:

• Adjusted Equity Value: $22.6 million
• 50% upfront payment: $11.3 million

2. Structure Contingent Payments

The contingent payment will be based on future performance metrics, such as the EBITDA achieved after one year.

Example Structure:

• The remaining 50% ($11.3 million) will be paid if the company achieves an EBITDA of $5 million in year one.
• If EBITDA is less than $5 million, the contingent payment will be reduced on a sliding scale.

Contingency Formula:

• If EBITDA is $4 million (below target), then the payment might be adjusted proportionally. For example, if the EBITDA is only 80% of the target, then the contingent payment will be 80% of the remaining $11.3 million.

Adjusted Payment = Contingent Payment × (Actual EBITDA / Target EBITDA) = $11.3 million × (4 million / 5 million) = $9.04 million

3. Earn-Out Agreement

This earn-out can be structured with a time frame (e.g., one year), and clearly defined targets. The buyer and seller agree on terms such as:

• Time frame for achieving targets (one year).
• Metrics used (EBITDA, revenue, etc.).
• Calculation method for the contingent portion.

4. Adjust for Other Contingencies

The agreement may also include:

• Performance clauses for revenue, working capital, or customer retention.
• Protections for both parties, such as setting a minimum contingent payment.

Example Summary

• Upfront Payment: $11.3 million paid at closing.
• Earn-Out: Up to $11.3 million contingent on achieving $5 million EBITDA within one year.
• If the EBITDA is $4 million (80% of the target), the earn-out payment would be $9.04 million.

Final Considerations

• Due Diligence: Ensure thorough due diligence on working capital, debt levels, and normalization adjustments.
• Sensitivity Analysis: Analyze different scenarios for future performance to understand the range of potential outcomes for contingent payments.
• Negotiation: Structure the deal terms to ensure alignment between buyer and seller for long-term success.