This article begins with a discussion of EBITDA, or earnings before interest, taxes, depreciation, and amortization. The focus on the EBITDA of private companies is almost ubiquitous among business appraisers, business owners, and other market participants. The article then addresses the relationship between depreciation (and amortization) and EBIT, or earnings before interest and taxes, as one measure of relative capital intensity. This relationship, which is termed the EBITDA Depreciation Factor, is then used to convert debt-free pretax (i.e., EBIT) multiples into corresponding multiples of EBITDA. The article presents analysis that illustrates why, in valuation terms (i.e., expected risk, growth, and capital intensity), the so-called pervasive rules of thumb suggesting that many companies are worth 4.0× to 6.0× EBITDA, plus or minus, exhibit such stickiness. The article suggests a technique based on the adjusted capital asset pricing model whereby business appraisers and market participants can independently develop EBITDA multiples under the income approach to valuation. Finally, the article presents private and public company market evidence regarding the EBITDA Depreciation Factor, which should facilitate further investigation and analysis.
