Valuation · 8 min read
EBITDA Multiples vs DCF: Which Valuation Method Applies to You
Every valuation method answers a slightly different question. Choosing the wrong one produces a number that cannot survive scrutiny from a buyer, an investor or a regulator.
The methods
Four approaches and what each assumes
EBITDA multiple (market approach)
Assumes today's normalised earnings are repeatable and that comparable transactions are a fair guide to price. Best for established, profitable businesses with a stable trading history.
Discounted cash flow (income approach)
Assumes you can forecast free cash flow credibly and select a defensible discount rate. Best where future performance differs materially from the past: new capacity, long contracts, infrastructure.
Revenue multiple
Used where profit is deliberately suppressed by growth spending. Common for subscription, software and marketplace businesses, usually referenced to annual recurring revenue and retention.
Asset or replacement value
Used for asset-heavy, loss-making or wind-down situations, and as a floor cross-check for businesses where the balance sheet carries most of the value.
Choosing
Which method fits your situation
- Profitable manufacturer or services firm with three stable years: EBITDA multiple, cross-checked with DCF.
- Owner-operated small business: adjusted owner earnings, cross-checked against asset value.
- SaaS or subscription business: ARR multiple adjusted for growth, churn and gross margin.
- Pre-revenue or early-stage startup: comparable transactions and negotiated terms, not earnings.
- Infrastructure, real estate or long-contract assets: DCF as the primary method.
- Distressed or asset-heavy business: net asset and replacement value as the anchor.
- Minority stake: apply discounts for lack of control and marketability where relevant.
- Regulatory or tax purpose: the method prescribed for that purpose takes precedence.
Cross-checking is the point
Common errors
Where valuations go wrong
Most disputed valuations fail on inputs, not arithmetic.
- Applying a multiple to unadjusted accounting profit rather than normalised earnings.
- Comparing against listed-company multiples without discounting for size and liquidity.
- Forecasting hockey-stick growth in a DCF without capacity or pipeline to support it.
- Ignoring the capital expenditure required to sustain the forecast cash flows.
- Confusing enterprise value with equity value by forgetting net debt.
- Valuing a minority stake as if it carried control.
- Treating related-party or one-off revenue as recurring.
Next step
Verify the inputs before you trust the output
Whichever method you choose, the result is only as good as the underlying numbers. That is why buyers and investors run due diligence alongside valuation.
- Earnings that reconcile with bank and tax records support the top of the range.
- Unrecorded liabilities reduce equity value directly, whatever the method.
- Customer concentration compresses the multiple rather than the earnings.
- Contract transferability determines whether forecast cash flows survive the sale.
FAQ
Valuation method questions
Is DCF better than an EBITDA multiple?+
Neither is universally better. A multiple relies on market evidence and is quick to test; a DCF captures future changes but depends heavily on assumptions. Advisers commonly run both and reconcile them.
What EBITDA multiple should I expect?+
It varies by sector, size, growth and risk, and published ranges for listed companies are not directly transferable to private businesses. A valuation grounded in comparable private transactions is the reliable guide.
How is a startup valued with no profit?+
Through comparable transactions, revenue or user metrics, milestone progress and negotiated terms with investors, rather than through earnings-based methods.
Which method should be written into a shareholders' agreement?+
Fix the basis of value, the method and the appointment of an independent valuer in the agreement itself, before any dispute arises. That single clause prevents most valuation disputes at exit.
Get a valuation built on the right method for your business.
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