EBITDA Multiple Basis

EBITDA multiple basis is the approach mezzanine debt lenders use to calculate their loan size.  They take EBITDA and then apply an appropriate EBITDA multiple to come up with the loan size.  An EBITDA multiple is called a leverage ratio and is calculated by using total debt as the numerator and EBITDA as the denominator.  The lower the EBITDA multiple, the lower the leverage ratio which implies reduced credit risk.  Conversely, the higher the EBITDA multiple, the higher the leverage ratio which implies higher credit risk.  Certain industries naturally carry lower risk than others and mezzanine debt lenders are comfortable lending on a higher EBITDA multiple basis.  In general, the EBITDA multiple used by mezzanine debt lenders and private credit lenders range from 3.0 times to 5.0 times and is dependent on company size, industry and type of transaction.  Bigger companies loan structures reflect higher EBITDA multiples.  Contractual revenue companies also sport higher EBITDA multiples.   EBITDA multiple basis is a flexible way to measure dynamic growth within a timeframe, resulting in the ability to draw more capital within an acquisition facility.  Many acquirers engaged in roll-ups use this concept of EBITDA multiple basis to structure loans that give them more access to capital as their EBITDA increases, thereby unlocking future acquisition capital.   The measurement on an EBITDA multiple basis is dependent upon the quality and reliability of EBITDA to create a stable loan structure.  If the EBITDA is weak or non-recurring, the calculation will yield a loan size that is non-supportable over the long term.