Business Valuation Using the Multiples Method

Key facts at a glance:

• A multiplier ("multiple") is a comparative metric and serves as a common tool for calculating company value.

• When calculating company value, multipliers from the sales of comparable companies are used.

• When selecting a multiplier, key figures such as EBIT, EBITDA, or the revenue of the company being valued are used.

• When selecting the right peer group, metrics such as employee count, company size, and comparable financial and asset structures of the peer companies are considered.

• Company value can be distinguished between enterprise value and equity value.

What Does a Multiple Indicate?

A multiple, or multiples method, is a comparative metric and serves as a common tool for calculating company value. The multiples method is classified as a market-oriented valuation approach. By multiplying a business metric by a corresponding ratio (multiplier), the company value can be determined.

In market-oriented business valuation, two types of multiples are also distinguished: stock market multiples and M&A multiples. Stock market multiples are based on the share prices of comparable listed companies. In contrast, M&A multiples are based on the purchase prices paid in company acquisitions.

How Is the Multiples Method Applied?

When calculating company value, multipliers from the sales of comparable companies are used. The average value is then determined from the results. In the next step, this value is multiplied by the chosen metric of the company being valued.

Company value = Reference value × Multiplier

The following variables apply. When selecting a multiplier, key figures such as EBIT, EBITDA, or the revenue of the company being valued are set in relation to the company value. When selecting the right peer group, metrics such as employee count, company size, and comparable financial and asset structures of the peer companies or comparable M&A transactions are considered.

Furthermore, company value can be distinguished between enterprise value and equity value. For the shareholder, the equity value is most relevant and can be calculated as follows: enterprise value minus financial debt plus excess liquid assets.

Equity Value = Enterprise Value – Financial Debt + Excess Liquid Assets

Advantages and Disadvantages of the Multiples Method

Because the multiples method is based on figures from real transactions, it has a high degree of practical relevance. The implementation is also easier to carry out, provided one has a sufficient dataset of company transactions.

However, this point also reveals a fundamental problem, as there is only limited publicly available data from company transactions, meaning the data volume may not always be sufficient. Nevertheless, the method enables us to obtain an initial rough idea of a company's value or to verify the plausibility of a calculated company value.