EBITDA Multiples vs DCF: Choosing the Right Valuation Method

EBITDA multiples vs DCF

When a business owner considers selling their company, or simply wants to know how much it is worth, they are almost immediately faced with a technical question with very practical implications: which valuation method to use? EBITDA multiples and discounted cash flow (DCF) are the two most widely used approaches in the mergers and acquisitions (M&A) market. Neither is universally superior. Each responds to a different logic, has its strengths and weaknesses, and its suitability depends on the specific characteristics of the business and the context of the transaction.

We explain both methods in detail, compare their advantages and drawbacks, identify the most frequent mistakes in their application and offer practical criteria for knowing when to use one, the other, or both in a complementary way. If you are looking for an overview of all the available approaches, you can start with our guide to business valuation methods.

What EBITDA is and why it is the key metric in M&A

EBITDA is operating profit before interest, taxes, depreciation and amortisation (Earnings Before Interest, Taxes, Depreciation and Amortisation). In simplified terms, it represents a company's gross operating capacity to generate cash.

In M&A transactions, EBITDA is used as a proxy for operating cash flow because it removes distortions arising from the financial structure, tax policy and accounting decisions on depreciation. It allows companies of different sectors and sizes to be compared on a more homogeneous basis, facilitating both the negotiation and the comparison with precedent transactions.

Normalised EBITDA: the starting point

A frequent mistake in valuation processes is to use accounting EBITDA directly, without adjusting it. In the reality of the Spanish middle market, the EBITDA that appears in the financial statements rarely reflects the true potential of the business. It is common to find:

• Remuneration of the owner or family members above or below market
• Personal expenses charged to the company
• Non-recurring extraordinary costs: litigation, restructuring, accidents
• One-off income or losses that distort the normalised trend

The normalisation process consists of identifying and adjusting these items to obtain an adjusted EBITDA that reflects the ordinary, recurring result of the business. It is to this normalised EBITDA that the multiple is applied — not to the raw accounting figure — and it is also the basis on which the DCF financial plan is built.

Recommendation: companies contemplating a sale in the medium term should start auditing and documenting EBITDA adjustments at least three years in advance. Documenting each extraordinary item reliably — with invoices, judgments or contracts to support it — removes information asymmetries and significantly strengthens the credibility of the figure before buyers during due diligence.

Calculating and documenting normalised EBITDA with technical judgement is one of the tasks where a fractional CFO adds the most value in the years leading up to the sale.

The EBITDA multiples method

The multiples approach consists of applying to the company's normalised EBITDA a coefficient representative of the sector, adjusted for size, risk profile and market conditions. The result is the Enterprise Value (EV), i.e. the value of the company as a whole, including debt. To obtain the Equity Value — what the seller actually receives — net financial debt is deducted and the equity bridge adjustments are applied.

Formula: Enterprise Value = Normalised EBITDA × Sector multiple | Equity Value = EV − Net financial debt ± Adjustments

We go deeper into the calculation and the selection of the peer group in our guide to valuation by comparable multiples, and into the interpretation of the specific ratio in the article on how to interpret EV/EBITDA.

From Enterprise Value to Equity Value: the equity bridge

In M&A, transactions are structured on a cash-free, debt-free basis: it is assumed that the company is transferred free of cash and free of financial debt, so that the seller retains surplus cash but also repays or transfers all debt before closing. Net Financial Debt is calculated as the sum of all interest-bearing liabilities — short- and long-term bank loans, shareholder loans, leases — less the cash available on the balance sheet.

However, not all the cash on the balance sheet is surplus. So-called operating cash — the minimum balance needed to meet the day-to-day payments of the business — is considered an asset tied to operations and does not count as a favourable adjustment for the seller. Only cash in excess of that operating threshold is considered surplus cash and adds to the final price.

To this is added an adjustment frequently underestimated by sellers: the Working Capital Target. In the letter of intent (LOI) and in the sale and purchase agreement (SPA), the parties agree a normalised level of working capital, calculated as the historical average the business has needed to operate without cash strain over a full seasonal cycle. At the closing date, actual working capital is audited:

• If it is below the agreed target, a negative adjustment is applied to the price — to prevent the seller from having stripped capital out of the business before closing.
• If it exceeds the target, the seller receives an additional positive adjustment.

This mechanism can mean differences of hundreds of thousands of euros on the final price. That is why it is essential to agree the exact definition of the Working Capital Target in the early stages of the negotiation, and never to leave it for the final SPA. We develop the distinction between the value of the business and what the shareholder receives in the article Enterprise Value vs Equity Value.

Advantages of valuing by multiples

• Speed and simplicity. It is the fastest method for obtaining a first reference without having to build complex financial models. In the initial exploration phases, multiples make it possible to establish an indicative range in little time.
• Anchored in real transactions. If recent comparables are available — same industry, similar geography, comparable size — the multiple reflects what real buyers have paid under market conditions. That gives it an empirical legitimacy that is hard to rebut in a negotiation.
• Effective communication. Multiples are intuitive and easy to explain to financial and strategic buyers and to business owners themselves, facilitating dialogue and the alignment of expectations.
• Less dependence on projections. Being based on historical or current data, they reduce the uncertainty associated with estimating the future. They are especially useful when visibility over the evolution of the business is limited.

Limitations of the multiples method

• Static by nature. Multiples photograph the business at a given moment. They do not capture potential growth or the investments needed to sustain it. A company in expansion may be undervalued; one in decline may look attractive with a multiple that does not discount the trend.
• Sensitivity to the economic cycle. Multiples fluctuate with the market. In phases of expansion and abundant liquidity they move upwards; in contraction cycles, they fall. An identical company can obtain very different valuations depending on the timing of the transaction.
• They ignore capital structure and CAPEX. Two companies with the same EBITDA can have very different valuations if one has high recurring CAPEX, higher net debt or structurally high working capital requirements. The multiple without these adjustments can generate misleading comparisons.
• Dependence on reliable comparables. In sectors with few transactions or high heterogeneity between companies, finding representative multiples is difficult. The limited depth of the Spanish transaction market in the SME segment can make the available comparables weak.

Frequent mistakes when applying EBITDA multiples

Knowing the limitations of the method is useful, but identifying the specific mistakes made in practice is what makes it possible to avoid valuations that do not withstand the scrutiny of an informed buyer.

1. Applying the multiple to EBITDA without normalising it: This is the most widespread mistake and the one with the greatest economic impact. If the starting EBITDA has not been cleansed — if it includes a below-market owner salary, personal expenses or extraordinary costs — the multiple amplifies those distortions directly onto the price. An EBITDA inflated by €200,000, multiplied by 6x, means an overvaluation of €1.2 million that the buyer will detect in due diligence and use to renegotiate the price downwards at the worst moment of the process.
2. Using comparables that are not really comparable: Not all transactions in the same sector are comparable with one another. An industrial services company with recurring long-term contracts is not comparable to another with the same activity code whose revenue comes from one-off projects. Using a reference multiple without adjusting for business model, geography, size or point in the cycle produces a valuation that looks objective but is badly calibrated. Rigour in the selection and adjustment of comparables is as important as the multiple itself.
3. Ignoring the investment needs of the business: Two companies can have the same EBITDA but radically different cash profiles if one needs to invest on a recurring basis in machinery, fleet or infrastructure to maintain its activity. Applying the same multiple to both without adjusting for maintenance CAPEX systematically overvalues the more capital-intensive ones. The buyer will know this; the seller should know it too before sitting down to negotiate.
4. Failing to distinguish between Enterprise Value and Equity Value: It is common for a business owner to confuse the value of their company with what they will receive in their pocket on closing the sale. If the business has significant net financial debt, the difference can be very material. An EV of €5 million with net debt of €1.5 million produces an Equity Value of €3.5 million. Understanding this distinction from the start of the process avoids mismanaged expectations and disappointment at the closing stage.
5. Accepting market multiples without questioning the point in the cycle: A sector's multiples from recent years are not necessarily those the buyer will apply at the time of the transaction. Multiples compressed in high-interest-rate environments or periods of weaker buyer appetite can differ significantly from those observed in earlier phases of abundant liquidity. Setting price expectations based on multiples from a cycle different from the current one is a frequent source of frustration in sale processes.

The DCF method (Discounted Cash Flow)

DCF starts from a different premise: the value of a company is equal to the present value of all the free cash flows it will generate in the future, discounted at a rate that reflects the cost of capital and the risk of the business — usually the WACC or Weighted Average Cost of Capital. We explain how that rate is calculated in the article on the weighted average cost of capital (WACC).

The model requires building a detailed financial plan with projections of revenue, margins, CAPEX, changes in working capital and debt position. At the end of the explicit projection period — usually five to ten years — a terminal value is calculated, which usually represents the largest part of the total value of the company.

Advantages of DCF

• It captures intrinsic value. DCF is not subject to market fluctuations or the availability of comparables. It values the company for what it is capable of generating, regardless of what others pay for similar businesses.
• It reflects growth and investment. Unlike multiples, DCF explicitly incorporates growth prospects, the investments required and the evolution of margins. It is the most appropriate method for companies with a dynamic profile, in the process of transformation or with a business clearly differentiated from market comparables.
• It allows sensitivity analysis. The structure of the model makes it easy to assess how the valuation changes with variations in the key assumptions: growth rate, margins, CAPEX or discount rate. This gives a view of the value range and of the levers with the greatest impact, very valuable information for both the seller and the adviser.

Limitations of DCF

• High sensitivity to assumptions. Small variations in the discount rate or the terminal growth rate can generate very significant differences in valuation. A badly calibrated DCF can be more misleading than a multiple applied with good judgement.
• Technical complexity. It requires detailed data, advanced financial knowledge and time to build and test the model. It is not the most suitable method for initial explorations or for companies with limited financial information.
• Limited in businesses with volatile cash flows. In highly cyclical sectors, recently created companies or businesses with irregular revenue, projecting cash flows introduces a level of uncertainty that can invalidate the model's conclusions.

Frequent mistakes when applying DCF

DCF is the most powerful method when well built, and the most dangerous when it is not. Its complexity invites errors that are not always visible to the non-specialist reader, but which a sophisticated buyer will detect easily.

1. Projecting growth rates the sector itself cannot sustain: This is the most common conceptual mistake. The business plan assumes that the company will grow at 15% a year for five years in a mature sector that historically grows at 3%. Nobody questions the numbers in the initial phases, but when the buyer arrives with its own analysts, the model is exposed. A DCF with growth assumptions that cannot be justified with real sector data is not worth anything as a price argument; it is worth something as a warning sign.
2. Using a discount rate that is too low for the company's profile: The discount rate must reflect the real risk of the business. Applying to a Spanish SME with high dependence on the founder, a concentrated customer base and no professionalised management team a rate similar to that of a listed company with recurring revenue and established teams produces an artificially high valuation. In the Spanish middle market, realistic discount rates for this type of company sit clearly above those obtained from theoretical models not adjusted for the specific risk of the business.
3. Inflating the terminal value without modelling the investments needed to sustain it: The terminal value — the estimated value of the company at the end of the projection period — usually accounts for more than 60% of the total value in a DCF. If that value is calculated assuming the business will keep growing indefinitely, but without modelling the maintenance CAPEX or the investments needed to sustain that growth, the result is structurally inflated. A buyer who reviews the model in detail will see it immediately.
4. Failing to check the result against market reality: A DCF performed in isolation, without cross-checking the result against the multiples of comparable transactions, can produce valuations that are mathematically coherent but economically unrealistic. If the model yields a value that implies a multiple of 14x EBITDA in a sector where transactions close at 6x, the problem is not in the arithmetic: it is in the assumptions. DCF must always be used in dialogue with the market, not as a substitute for it.
5. Presenting the DCF as a single figure rather than a range: DCF does not produce an exact value; it produces a range depending on the assumptions used. Presenting a single number — without sensitivity analysis or alternative scenarios — gives a false sense of precision and leaves the seller with no room for manoeuvre when the buyer, inevitably, questions the assumptions. A well-built DCF should show at least three scenarios — base, conservative and optimistic — and quantify how value varies with changes in the key variables.

In both methods, the underlying mistake is the same: confusing the value one wants to obtain with the value the market is willing to pay. The function of a good adviser in a professional business valuation is precisely to anchor the valuation in reality before the buyer does.

Size matters: the illiquidity discount in the Spanish middle market

The size of the company directly influences the valuation, regardless of the method used. In the transaction market, this adjustment is technically articulated through the Discount for Lack of Marketability (DLOM), which reflects that transferring ownership of a private company is a costly, slow and uncertain process compared with selling shares listed on a stock exchange.

The DLOM is not a uniform constant: it is calibrated according to operating size, margin stability, customer diversification and the degree of professionalisation of the management team. A company with a management team independent of the founding shareholders and a diversified customer base will defend a significantly lower illiquidity discount than a business with high dependence on the principal owner.

In practical terms, in the Spanish market it is common to observe:

• EV/EBITDA multiples of 3x to 5x for companies with EBITDA below €1 million
• Ranges of 5x to 8x for companies with EBITDA between €2 and €10 million
• Multiples above 8x in sectors with strong buyer demand, recurring revenue or differentiated assets

These ranges are indicative and vary considerably by sector, management quality and growth profile. The adviser's job is to position the company at the high end of the justifiable range, building the qualitative and quantitative arguments that support it. When it comes to a group with several companies, the valuation logic changes: we address it in valuation of groups of companies and holdings.

When to use each method: triangulation as best practice

In professional M&A practice, the two methods are used in a complementary, not mutually exclusive, way. Valuation by multiples establishes a market reference range; DCF checks that range against the economic reality of the business and its prospects.

The bridge between the two methodologies is the so-called implied multiple. Once the DCF model is finished and the resulting Enterprise Value obtained, this value is divided by the company's current adjusted EBITDA. The result is the multiple that the DCF itself is implicitly assuming.

Implied multiple = Enterprise Value (DCF) ÷ Normalised EBITDA

This implied multiple is then compared with those observed in real transactions in the sector. If the DCF yields an implied multiple of 11x but the average of transactions closed in the sector sits between 5x and 7x, the discrepancy signals that the financial plan is assuming growth or margins that are hard to defend before a sophisticated buyer. This forces the model's assumptions to be reviewed iteratively until intrinsic value and market value are consistent with each other.

This cross-validation exercise is especially valuable in a sale process: it turns the valuation into a coherent argument that withstands the objections buyers will inevitably raise in the due diligence and price negotiation phases.

• Use multiples preferably when: the company has stable, recurring EBITDA, there are recent comparable transactions in the sector, or a quick reference is sought in a preliminary exploration phase.
• Use DCF preferably when: the company has a growth profile that comparables do not capture, it is in a process of operational transformation, or intrinsic value differs significantly from the market price of comparables.
• Use both and check consistency through the implied multiple when: a formal valuation is being prepared for a sale process or you are negotiating with sophisticated buyers who will question any inconsistency between the business plan and market prices.

The particular case of companies without representative EBITDA — start-ups and high-growth businesses — requires its own methods, which we explain in how to value a start-up.

Conclusion: choosing between EBITDA multiples and DCF to value companies

The choice of valuation method is not a neutral exercise: it has direct consequences for the price at which a transaction closes and for the business owner's ability to defend their expectations before a buyer. Knowing the strengths, limitations and frequent mistakes of each approach is the first step towards negotiating from an informed, coherent position.

In M&A, the valuation method must always serve the argument, not the other way round. The adviser's task is to select and combine the approaches that best reflect the real value of the business, validate their consistency through the implied multiple, and communicate it in a way that withstands the analysis of any sophisticated buyer.

Are you considering selling your company or do you want to know its market value? At Maraz Corporate Finance we carry out business valuations integrating multiples, DCF and comparable transactions, and we run the sale or M&A transaction through to closing. Contact our team for an initial no-obligation consultation.

Javier de Rojas Roca de Togores

Partner - Maraz Corporate Finance

Frequently asked questions about EBITDA multiples vs DCF

Which method is better, EBITDA multiples or DCF?

Neither is universally superior. Multiples give the market reference (what is paid today for similar companies) and the DCF gives intrinsic value (what the business can generate). A professional valuation uses both and checks their consistency through the implied multiple.

What is normalised EBITDA and why does it matter so much?

It is EBITDA adjusted to remove non-recurring or distorting items (excess owner remuneration, personal expenses, extraordinary costs) and reflect the ordinary result of the business. It matters because the multiple is applied to it, not to the accounting figure: a poorly normalised EBITDA amplifies the error in the price. We develop this in the guide to valuation by multiples.

Why don't I receive the same as my company's value when I sell it?

Because the multiple gives the Enterprise Value (value of the whole business), but the seller receives the Equity Value, which results from subtracting net financial debt and applying the equity bridge adjustments (surplus cash, working capital target). The difference can be very significant. We explain it in Enterprise Value vs Equity Value.

What EV/EBITDA multiple is paid in Spain?

As an indicative reference, in the Spanish middle market it is common to see 3x to 5x for companies with EBITDA below €1 million, 5x to 8x between €2 and €10 million, and above 8x in sectors with strong buyer demand or recurring revenue. The specific range depends on the sector, the quality of the EBITDA and the risk profile of the business.

When should a professional valuation be commissioned?

Ideally, 12-24 months before going to market: that is the time needed to optimise EBITDA, professionalise reporting and reduce the dependencies that compress the multiple. An early valuation, integrated into the preparation of the sale of the company, is the best investment to defend the price. The valuation also anticipates what the due diligence will examine.