Anyone looking to have their business valued will quickly come across multiples. It’s the most commonly used method in acquisition discussions because it’s quick and easy to understand. But be careful: multiples are a useful benchmark, not an absolute truth. In this blog, we explain how the method works, what to watch out for, and when things can go wrong.
What exactly are multiples?
A multiple is a ratio between a company’s value and a financial metric, typically EBITDA, revenue, or profit. The best-known multiple is EV/EBITDA: enterprise value divided by earnings before interest, taxes, depreciation, and amortization. If a comparable company was sold for 6x EBITDA, that could be an indication that your company is also valued within that range.
Why are multiples so popular?
The main advantage of multiples is their simplicity. Buyers and investors like to use them because they allow for a quick market comparison. Especially in sectors with a high volume of transactions, such as IT, business services, and retail, there are plenty of benchmarks to work with.
Multiples also provide an immediate snapshot of how the market values your industry. This makes them a useful reality check: what are buyers actually willing to pay?
What should you watch out for?
The strength of multiples is also their weakness. This is because the outcome depends entirely on the quality of the comparables. Are the selected companies truly comparable in terms of scale, margins, and growth expectations? Have the figures been properly normalized? And are the transactions recent enough to be relevant?
A second pitfall: price is not the same as value. Multiples show what buyers have paid in the past, not what your company’s fundamental performance is. Hype can temporarily drive up valuations, even when cash flows don’t justify them.
What types of multiples are there?
The most commonly used multiples are:
- EV/EBITDA: the standard for many SMB and larger deals.
- EV/Sales: commonly used for young companies that are not yet profitable, such as SaaS companies.
- Price-to-Earnings (P/E) Ratio: commonly used for publicly traded companies.
Which multiple is most appropriate depends on the industry and the stage the company is in.
How can you use multiples wisely?
Multiples are not a calculation tool for deriving a single number, but rather a benchmark. Use them to outline a range, in addition to fundamental methods such as DCF.
A realistic valuation report typically combines:
- DCF as a Basis for Estimating Future Value
- Multiples as a Market Test
- Intrinsic value as a lower limit
This is how you create a narrative that’s not only backed by solid data but also resonates with the market.
Frequently Asked Questions
What is the most commonly used multiple?
EV/EBITDA. It provides an accurate picture of operational profitability and is widely accepted in the market.
Can I apply a multiple myself?
Yes, but be critical. Use recent transactions in your industry and make sure your EBITDA is normalized.
Why do multiples vary by sector?
Because risk, growth, and margins differ. IT companies are scalable and command higher multiples, while retail companies are often valued lower due to thin margins and sensitivity to economic cycles.
Would you like to know which multiples buyers in your industry use and how you can best capitalize on them? Schedule a no-obligation consultation with Hogenhouck M&A. We combine market data with your unique company profile to deliver a valuation that’s accurate and compelling.
