The Multiple & WACC
Definition
The multiple is the number applied to Normalized EBITDA to calculate enterprise value. When someone says a business is “worth 5x,” they mean the enterprise value is five times the normalized EBITDA. The multiple is the single most misunderstood number in business valuation — most owners treat it as a market opinion or a negotiation outcome. It’s not. It’s a math problem.
The Weighted Average Cost of Capital (WACC) is where the multiple comes from. WACC blends the cost of debt and the cost of equity, weighted by the company’s capital structure. The multiple is simply one divided by the WACC. If WACC is 20%, the multiple is 5x. If WACC is 15%, the multiple is 6.67x.
Why This Matters for Owners
The multiple is the biggest lever on enterprise value — and it’s the one most owners have the least intuition about. Growing EBITDA from 3M doubles the earnings base. But if the multiple also moves from 4.5x to 6.7x, the enterprise value nearly triples. That multiple expansion comes from de-risking the business, which lowers the cost of equity, which lowers the WACC, which raises the multiple.
This is the mechanism behind the entire Ownership OS: the things that make a business less risky — sustainable financials, predictable revenue, transferable margins, a real leadership team — are the same things that expand the multiple.
How the Math Works
WACC = (% debt × after-tax cost of debt) + (% equity × cost of equity)
The cost of debt is observable — it’s the interest rate on the company’s loans, adjusted for the tax shield. The cost of equity is built up from the risk-free rate plus layers of risk premium: equity risk, size premium, industry risk, and company-specific risk. That last component — company-specific risk — is the one the owner controls. It’s what the Velocity Score™ measures.
Example (Advanced Solutions Point A): 35% debt at 7.5% effective rate (2.6% contribution) + 65% equity at 30% required return (19.5% contribution) = 22.1% WACC = 4.52x multiple.
Example (Advanced Solutions Point B): 40% debt at 7.5% (3.0%) + 60% equity at 20% (12.0%) = 15.0% WACC = 6.67x multiple.
The cost of equity dropped from 30% to 20% because the company-specific risk decreased. More predictable cash flow also supports a higher debt ratio, which further reduces WACC because debt is cheaper than equity.
Where This Concept Appears
- Lesson 36 — Full teaching lesson on the multiple, WACC, and buildup methodology
- Lesson 38 — Case study showing different multiples for Advanced Solutions vs Rockin’ Times
- Lesson 45 — WACC mechanics driving the multiple expansion from 4.52x to 6.67x over five years
- Module 2 (Expand Knowledge) — The multiple is the second of four KPIs in market value