The business valuation multiples is a method used in company valuation that helps to calculate the target value of a company.
Through this company valuation method This method of valuing companies by multiples does not calculate the absolute or intrinsic value of the company, but rather a range of values relative to other similar companies. It is used to better delimit the range previously obtained using the discounted cash flow method. It is a necessary complement for a good analysis.
To do this multiples method of valuing companiesis necessary:
Of all these companies that may share characteristics, those that are most closely related and comparable should be chosen.
There really is no other company like it, which is why we talk about relative valuationas this method does not calculate the true value of the company. However, because there are companies that behave similarly in the market, this valuation method can serve as a "proxy" when valuing a realistic range.
Once the selection of these companies has been made, the second phase is followed by an analysis of all the metrics that may make sense when valuing a company, such as the following:
Metrics that vary and need to be analysed personally for each assessment.
Once all these multiples have been calculated, a statistical analysis is carried out to find which variables really influence the valuation of the company. The aim is to find which variables significantly affect the valuation of this group of companies. This analysis is crucial to understand which are the metrics that really affect the valuation of these comparable companies, as sometimes the "typical" variables such as EBITDA or sales are not the factors that most affect the valuation.
The data used for the metrics, both the valuation of companies and the various financial statements of comparable companies, can be obtained both from financial information, which must be published periodically by listed companies, and from data on past transactions.
Once the hypotheses have been tested and the metrics that work in the sector have been discovered, we move on to the calculation of the mean and median of these multiples. Normally, the median of these multiples is of more interest, to avoid the effects of those companies that are at the top or that are less highly valued, and to find a more realistic valuation. However, the median of the multiples should not be ignored, as they can be used to understand the polarisation of sectors and to distinguish strata of comparable companies.
Thanks to these metrics, a valuation range is obtained, which is then applied in a complementary way to the discounted cash flow method, with the objective of making the valuation more precise, i.e. it serves as a complement to achieve a more accurate valuation as well as serving as a sanity check, avoiding errors in the assumptions used for the projection.
Even so, the method by multiples has certain limitations: