EBITDA – What’s missing? (EBITDA Multiples Are BS – Part 2)

I continue to receive a lot of inquires about EBITDA multiples. Last week I spoke a bit about what EBITDA includes and what it excludes. A common retort to the question of EBITDA multiples is often “multiple of what”. Sometimes people interpret that to infer “multiple of sales, multiple of net, multiple of EBITDA, etc.” But what the question really driving at is “How was EBITDA calculated?” or “What is and is not included in these EBITDA multiples?” Here are a few items that are often missing from EBITDA multiples.

Note: I’m off to New Jersey and Philadelphia next week. Let’s connect if you’re in the area. Hit REPLY and let me know where you are.


CAPEX, or capital expenditures, are the funds a company uses to buy or upgrade physical assets. Generally, I divide CAPEX into two buckets – maintenance and growth. Maintenance CAPEX are expenditures to keep a company competitive in the marketplace. Upgrading old computers or replacing that 15-year-old spot welder with the latest Car-O-Liner CTR12000 with dynamic pre-pulse and integrated quality assurance monitoring that recognizes and adjusts for substrates in real time (I think welders are cool). Growth CAPEX on the other hand are expenditures designed to increase existing capacity, such as expanding existing workspace or installing additional lifts, racks and booths.

CAPEX represents depreciable assets, and CAPEX expenses are removed from EBITDA. But CAPEX is a very real cost, and a critical consideration when evaluating a business. When working with clients on the buy-side, we include projected CAPEX expenditures post-close when evaluating the entire cost of the deal. If you are simply using a multiple to evaluate a business, you may overlook the very real cost of future capital expenditures.

Tenant Improvements

Acquiring a business generally means assuming a location, whether that be through a lease or a purchase of property. It also means entering a location that a third party has maintained for a number of years. Tenant improvements, while technically a portion of CAPEX, are often missing from EBITDA multiples. Yet TI’s represent a very real drain on cash, and are often a significant expense post close as the acquiring party invests in paint, signage, and other improvements to ensure the acquired location matches the brand image and standards of other existing locations. When evaluating the cost of an acquisition, we include projected TI expense as well as other CAPEX expenses.

Working Capital

Working capital is a measure of cash a business needs to support day to day operations. The formal definition of working capital is current assets minus current liabilities, a rather esoteric concept to many business owners. But when evaluating a company for an acquisition, not only is total working capital important, but even more important is the change in working capital. The change in working capital is important because it represents the additional cash that is used, or generated, as a result.

Relying solely upon a multiple does not take into consideration additional working capital a buyer will have to bring to a newly acquired business post close. When working with companies on acquisitions, we use numerous balance sheet metrics to estimate the working capital a buyer will need to bring post close (a common way to project working capital needs post close is compute your cash conversion cycle). And we also include additional working capital required when evaluating the entire cost of the transaction.

Tying it Together

Multiples are a quick and easy way to evaluate and compare multiple deals across an industry. EBITDA provides a tried and true method to approximate cash flow. But both can be misleading, and when not fully understood prone to manipulation. When evaluating the merits of an acquisition, it often pays to devote the extra resources to develop a financial model that takes CAPEX, working capital, and other relevant factors into consideration.

Next week I’ll discuss corporate and regional development plans, what they are, why they are important for companies pursing an inorganic M&A based growth strategy.

I want to help you avoid these mistakes and make great acquisitions. If you are considering acquisitions to grow your business, or you are already in acquisition mode, let’s talk about how we can work together.

Until next week!

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