What is EBITDA?

A commonly used valuation method in the business world is EBITDA, which involves multiplying a company’s Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) by a certain multiple to determine its overall value. This method is particularly useful for valuing companies with significant depreciation and amortization expenses, as it provides a more accurate representation of their true profitability.

There are many different EBITDA multiples that can be used to value a company, with 1x, 6x, and 12x being common benchmarks. A 1x multiple would imply that a company’s value is equal to its EBITDA, while a 6x or 12x multiple would suggest that the company is worth six or twelve times its EBITDA, respectively.

To increase a company’s EBITDA multiple, it’s essential to focus on the key drivers of profitability. This is where the E-Myth, O-Myth, and A-Myth come into play.

The E-Myth refers to the idea of working “in” the business, where the owner is responsible for day-to-day operations and tasks. The O-Myth involves working “on” the business, where the owner takes a more strategic approach and focuses on developing systems and processes to increase efficiency and profitability. Finally, the A-Myth involves working “above” the business, where the owner focuses on high-level strategy and long-term growth.

For example...

Let’s say a company currently has an EBITDA of $1 million and is valued at 6x EBITDA, or $6 million. By implementing new systems and processes that improve efficiency and profitability, the company may be able to increase its EBITDA to $2 million. If the company is then valued at 12x EBITDA, it would be worth $24 million, a four-fold increase from its original value.

In summary, EBITDA is an important valuation method for businesses, and increasing this multiple requires a focus on the O-Myth and A-Myth. By developing systems and processes that increase efficiency and profitability and investing in long-term growth strategies, companies can increase their EBITDA and overall value, potentially by multiples of 1x to 20x or more.

Grow Your business now

Start building in successful partnerships

Expand your reach and leverage strengths. We understand that every business is unique, which is why we tailor our services to meet your specific needs and goals.