FIN 375 Week 4 Participation Discussion Question 1

Each week three graded discussion questions are available for student responses. Each DQ is worth 20 points. You can do original posts or reply to other student posts.

Please read the week four online lecture. It discusses the concept of EBITDA.

Private equity firms, who buy and sell businesses, often use a multiple of EBITDA as a key part of their valuation of a business. Many private equity firms use a rule of thumb to not pay more than 3 to 5 times EBITDA for a business.

For example, if your business had EBITDA of 1,000,000 dollars and you were offered a price of 3 times EBITDA, that would mean you were offered 3 million dollars for your business.

If you wanted to buy a business and the current owner was asking for a price that was 10 times EBITDA why would you want to pay that price instead of 3 to 5 times EBITDA?