Private equity firms

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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?

Reference no: EM132524272

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