How would you adjust the EV/EBITDA multiple for rent expense for retail businesses?

Some retail businesses will choose to own their stores, and others will choose to rent. Those who choose to rent will have a lower EBITDA because rent expense reduces EBITDA.

We shouldn’t penalize retail companies for their decision to own or lease stores, since we are ultimately valuing the companies based on their ability to generate cash flows from their core business. Real estate ownership is not part of a retail company’s core business, so it’s better to back this out.

In order to compare EV / EBITDA multiples without penalizing companies who choose to rent, we can add back the rent expense from EBITDA. Adding back rent from EBITDA equals EBITDAR, or EBITDA before rent. We can look at EV / EBITDAR multiples to compare companies within the retail space which will neutralize the impact of real estate ownership vs. leasing.