by OverHeadWatch Team | Feb 22, 2017 | Budget Planning, Library
Why is knowing the EBITDA multiples by industry so important? Every owner, regardless of their stake, plans their exit strategy from a business; making money from a venture is nice, but you inevitably want to withdraw your profits and look for the next big thing. Consequently, an important aspect of any exit strategy is to be aware of the value of the company, especially when you want to sell your shares. However, valuating a company is a complicated process that contains plenty of nuances and invites a lot of debate.
One way of valuating companies is to compare them, using financial ratios and industry specific multiples, with other similar companies that operate within the same industry. Consequently, the concept here is very similar to estimating what your house should be worth on the market by comparing it to the prices fetched by neighboring houses. However, bear in mind that just as you can’t merely compare the price tag between neighboring houses without taking into consideration their sizes, among other things, it’s not enough to know how much companies within your industry sold for in the past couple of years.
You also need to take into consideration the size of each company, which can be roughly indicated by the EBITDA. Therefore, EBITDA multiples by industry are basically ratios between the price of a given company, which we will call Enterprise value (EV for short), within a sector and its EBITDA (which is almost the same as saying that within your neighborhood, the price of a square foot of housing is X).
What Is the EBITDA?
The EBITDA is an acronym for earnings before interest, tax, depreciation, and amortization. It gives a fairly accurate size of the business and the income it generates, assuming that the business doesn’t have any problems with its assets or liabilities. Think of it as net profit before deducing from it the ITDA part.
Why Use the EBITDA?
The EBITDA is by no means the sole variable used in calculating industry multiples. You could calculate the industry multiples using other factors such as the net income, the seller’s discretionary earnings (SDEs for short), owner’s equity, or number of subscribers. It really depends on the type of company, the sector it’s in, and your own judgment.
For example, when comparing subscriber based businesses, it’s standard practice to look at the enterprise value divided by the number of subscribers. Conversely, for oil companies that work in the field, it should not be surprising to see the enterprise value divided by the amount of reserves at the company’s disposal.
Nevertheless, the use of the EBITDA is advantageous due to its ability to be standardized across all industry sectors. Moreover, EBITDA multiples by industry allow the user to contrast different industry sectors with one another.
What Factors Affect the EBITDA Multiples by Industry?
Now that we have a fundamental grasp of what EBITDA multiples by industry are and why they are important, let’s look at the different factors affecting this multiple. In other words, if two companies have the same EBITDA, why should one of them be valued higher than the other, giving it a higher EBITDA multiple?
- The most important aspect that affects the EBITDA multiple is the industry. Think of it this way: high tech and IT companies are much more scalable than manufacturing plants. Therefore, this inherent potential is reflected in the higher valuation enjoyed by tech companies in general as opposed to manufacturing companies, which in turn means a higher EBIDTA multiple.
- The amount of inherent risk involved in a company and its activities versus the expected rewards is another variable that affects the EBITDA multiples. An excellent illustration of how risk affects the EBITDA multiples is to compare two companies of different sizes operating in the same sector. Performing this exercise, you’ll notice that not only will the larger company enjoy a larger valuation, which makes perfect sense, but the larger company will also benefit from a higher EBITDA multiple. This is because a larger business is inherently less risky than a smaller one.
- The economic climate in which the business operates is a variable as well. This sort of goes back to risk vs. reward.
- The more asset-heavy a company is, the more likely it will get a lower EBITDA multiple. The same goes for working capital and required investments.
So What Are the EBITDA Multiples by Industry?
In general, any business with an EBITDA somewhere between the one million and ten million dollar range will enjoy an EBITDA multiple anywhere between 4.0 time to 6.5 times. Needless to say, these numbers are extremely generic, and plenty of industries have a multiple above or below that average. As previously mentioned, tech businesses that are within the same EBITDA range usually have an EBITDA multiple that’s higher than the 4-6.5 range, whereas manufacturing companies may be below said range. It is important to point out that the 4-6.5 range applies to relatively small businesses.
According to the Stern school of business at NYU, these are the EBITDA multiples by industry as of January 2017:
| Industry Name | EV/EBITDA |
| Advertising | 9.02 |
| Aerospace/Defense | 11.26 |
| Air Transport | 5. 62 |
| Apparel | 9.93 |
| Auto & Truck | 9.73 |
| Auto Parts | 6.64 |
| Bank (Money Center) | NA |
| Banks (Regional) | NA |
| Beverage (Alcoholic) | 18.49 |
| Beverage (Soft) | 15.94 |
| Broadcasting | 9.74 |
| Brokerage & Investment Banking | NA |
| Building Materials | 10.62 |
| Business & Consumer Services | 11.51 |
| Cable TV | 11.31 |
| Chemical (Basic) | 9.40 |
| Chemical (Diversified) | 10.38 |
| Chemical (Specialty) | 11.81 |
| Coal & Related Energy | 10.00 |
| Computer Services | 10.74 |
| Computers/Peripherals | 9.14 |
| Construction Supplies | 12.28 |
| Diversified | 13.68 |
| Drugs (Biotechnology) | 11.62 |
| Drugs (Pharmaceutical) | 13.27 |
| Education | 8.41 |
| Electrical Equipment | 12.73 |
| Electronics (Consumer & Office) | 9.99 |
| Electronics (General) | 11.57 |
| Engineering/Construction | 9.40 |
| Entertainment | 10.33 |
| Environmental & Waste Services | 11.11 |
| Farming/Agriculture | 12.81 |
| Financial Svcs. (Non-bank & Insurance) | NA |
| Food Processing | 13.64 |
| Food Wholesalers | 11.63 |
| Furn/Home Furnishings | 9.50 |
| Green & Renewable Energy | 12.35 |
| Healthcare Products | 14.87 |
| Healthcare Support Services | 9.48 |
| Heathcare Information and Technology | 16.98 |
| Homebuilding | 11.00 |
| Hospitals/Healthcare Facilities | 7.89 |
| Hotel/Gaming | 12.30 |
| Household Products | 13.55 |
| Information Services | 15.57 |
| Insurance (General) | 12.48 |
| Insurance (Life) | 10.02 |
| Insurance (Prop/Cas.) | 10.36 |
| Investments & Asset Management | 21.61 |
| Machinery | 12.61 |
| Metals & Mining | 11.71 |
| Office Equipment & Services | 8.20 |
| Oil/Gas (Integrated) | 17.81 |
| Oil/Gas (Production and Exploration) | 16.70 |
| Oil/Gas Distribution | 14.03 |
| Oilfield Svcs/Equip. | 13.49 |
| Packaging & Container | 9.80 |
| Paper/Forest Products | 8.62 |
| Power | 10.23 |
| Precious Metals | 7.89 |
| Publishing & Newspapers | 7.21 |
| R.E.I.T. | 20.52 |
| Real Estate (Development) | 21.13 |
| Real Estate (General/Diversified) | 19.90 |
| Real Estate (Operations & Services) | 11.75 |
| Recreation | 10.86 |
| Reinsurance | 9.22 |
| Restaurant/Dining | 12.06 |
| Retail (Automotive) | 11.78 |
| Retail (Building Supply) | 11.47 |
| Retail (Distributors) | 12.61 |
| Retail (General) | 8.19 |
| Retail (Grocery and Food) | 8.00 |
| Retail (Online) | 26.41 |
| Retail (Special Lines) | 8.06 |
| Rubber& Tires | 4.97 |
| Semiconductor | 11.88 |
| Semiconductor Equip | 12.08 |
| Shipbuilding & Marine | 7.38 |
| Shoe | 13.71 |
| Software (Entertainment) | 17.18 |
| Software (Internet) | 20.69 |
| Software (System & Application) | 19.28 |
| Steel | 11.07 |
| Telecom (Wireless) | 7.26 |
| Telecom. Equipment | 11.70 |
| Telecom. Services | 7.17 |
| Tobacco | 15.20 |
| Transportation | 9.07 |
| Transportation (Railroads) | 10.20 |
| Trucking | 8.58 |
| Utility (General) | 11.57 |
| Utility (Water) | 13.70 |
| Total Market | 16.40 |
| Total Market (without financials) | 12.13 |
Conclusion
A lot of work goes into valuating a company; this is only the first step. Furthermore, there are several different ways for judging what a company’s worth, and these different methods can yield different results. Nevertheless, understanding industry standards and EBITDA multiples by industry is a solid first step towards learning how much a company is worth. Should you wish to pursue the matter further, you can look into the understanding the functions of different multiples other than the EBITDA. Moreover, you can research different valuation models.
Image from depositphotos.com.
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