How do you deal with negative EBITDA business valuation?

professional profile

February 25, 2024

by a professional from Xiamen University in Dublin, Ireland

Has anyone encountered life-style business that has negative reported EBITDA? What is your approach in valuing this kind of business? What would be reasonable for director's remuneration in the business?

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Reply by a lender
from Mississippi State University in Nashville, TN, USA
I’m an SBA Lender so I’m speaking through that lense. I would think the problem here is the same problem that any company with negative EBITDA would have. A valuation can take into account more than just EBITDA (namely owner’s compensation). However, if your question is whether or not a company can have negative EBITDA and/or SDE and have a positive valuation then I think the answer is no, at least for sba valuations since a valuation is usually either EBITDA or SDE multiplied by an appropriate multiple. Curious to hear others thoughts on your question also
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Reply by an intermediary
from Wake Forest University in Winston-Salem, NC, USA
Is the negative EBITDA temporary or going to be par for the course? If par, then reconsider the rationale for purchasing. If temporary (for whatever of many valid reasons), then as ^redacted‌ mentions, an alternative such as a multiple of revenue may be a good place to start, followed by a DCF of how you are expecting the company to perform (including sensitivity analysis).
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