When valuing a company, most professional advisors speak in terms of a multiple of EBIT or earnings before interest and taxes. That means that the final price paid they will pay for a company will depend largely on the company's anticipated future earnings, the amount of financial leverage the buyer will use, and the resulting return to the buyer can expect. Given a large enough sample size we can work backward to convert the final prices paid by buyers into an EBIT multiple that is useful for sellers and their advisors. In order for EBIT multiples to be a useful valuation tool, EBIT must be carefully defined so that it provides a meaningful comparison. Most buyers calculate EBIT by looking at a company's trailing 12 months earnings before interest and taxes.
Enterprise value is the total purchase price a buyer paid for the company.
This includes the owner's equity plus any interest bearing debt assumed by the buyer. Larger companies typically sell for higher multiples because they usually have stronger market positions, a professional management team in place, a more diversified customer base, and better access to capital. Another factor driving up the multiples for larger mid-market companies is the increasing demand from private equity groups. The recent success of these groups has created a massive influx of capital from institutional investors like insurance companies, university endowments, pension funds, and wealthy individuals. The money these funds have raised and that they are obligated to invest continues to create strong demand for acquisitions, especially for larger companies.