Valuation multiple on EBITDA or cash flow?

May 29, 2021

by a searcher from Indian Institute of Management Bangalore in Toronto, ON, Canada

Hi all, I'm looking at a deal in the B2C services space with good EBITDA margins and minimal capex. There's no interest and minimal depreciation so the tax impact is pretty high which reduces cash flow. Let's assume there's no working capital needs. I'm wondering how people look at valuing such deals - traditionally people quote multiple of EBITDA but in this case, if I pay say 5X EBITDA, it'll be more like 6.5-7X post-tax cash flow. I understand everything is a negotiation, but trying to understand how 1) acquirers, 2) equity investors and 3) banks think about numbers for such deals.

Thank you!

Reply by a professional
from University of Southern California in North Palm Beach, FL, USA

Warren Buffett says, “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 ‘bullshit’" Strong words from some of the most successful businessmen on the planet.

Reply by a searcher
from Hofstra University in Melville, NY, USA

Have you considered that you should be able to structure the acquisition where most of the purchase price should be able to be depreciated thus lowering your taxable income? Need a strong tax/accountant on the team to do free cash flow analysis pre and post tax.

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