Business Valuation Multiples: How to Know What Your Company is Worth

What do terms like '10x earnings' or '7x EBITDA' really mean? Few terms in business are as ubiquitous and as misunderstood as the 'valuation multiple.' It's a concept that seems straightforward—a simple number—yet it's shrouded in mystery and misconceptions.

What really lies behind these 'multiples' when we talk about company value or selling a business? Is a 10X valuation seen as typical, unlikely, or less than what the market usually offers?

Whether you are planning to sell or grow your business value, you need to think about your multiples and how you can maximise them. In today’s blog, we will be answering your questions about the different types of valuation multiples, and how it affects your business valuation.

What Are Business Valuation Multiples?

Much like investors assess the value of their shares in a public company by looking at the stock price and its corresponding market cap, understanding the valuation multiple in private business sales offers a similar insight, but with its own set of complexities.

In the public markets, this process is transparent and simplified. You know the value of what you own by multiplying the stock price by the number of shares you hold. However, in the private sector, determining the value of a business asset isn't as straightforward. Here, valuation multiples become a starting guide offering a comparative lens to gauge how your business stacks up against others in the industry. This will also help you understand valuation multiples by industry

Multiples analysis is a magnifier, a way to project the worth of your business based on a certain earnings metrics (discussed below). However, without the right context, it's as helpful as a map without legends.

How Are Business Multiples Measured?

Whether your selling products or services, when it comes to evaluating enterprise value multiple, various methods are employed. Understanding these methods is crucial for maximising your company's value. Here are the primary ways company valuation multiples are measured: 

  • Revenue Multiple: Calculated valuation multiples by dividing the company's total revenue by a relevant metric, such as industry benchmarks or projected future revenue. 
  • EBITDA Multiple: Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) is often used as a measure of value. The EBITDA multiple is derived by dividing the company's EBITDA by a comparable metric within the industry. 
  • EBIT Multiple: Similar to the EBITDA valuation multiples, the EBIT multiple focuses on earnings before interest and taxes. It provides insight into a company's operating profitability.
  • PE Ratio: The Price-to-Earnings (PE) ratio compares the company's share price to its earnings per share (EPS). It is commonly used in public markets but can also be applied to private businesses for valuation purposes. 
  • Asset-Based Multiples: These multiples assess the company's value based on its tangible assets, such as property, equipment, and inventory. Asset-based multiples include Price-to-Book (P/B) ratio and Price-to-Tangible Book Value. 
  • Industry-Specific Multiples: Depending on the type of business, certain industries have unique metrics that better reflect their value. For example, a technology company might use metrics like Price-to-Sales (P/S) ratio or Price-to-User ratio.

Understanding Risks and ROI

By now you might be wondering how business valuer and valuation experts come up with multiple metrics. Here’s our own perspective at Exit Advisory Group:

Multiples offer insights into both risk and return on investment (ROI). Comparing multiples against industry benchmark and similar businesses helps gauge valuation's alignment with potential risks, while understanding their narrative maximises ROI. By leveraging multiples, investors and strategic and financial buyers can navigate acquisitions more strategically.

What does this mean? Let’s take an example:

How much is your business worth right now? The amount your buyer is willing to wait to get his money back. Step into your buyer’s shoes - how many years would you expect to get your investment back on this business you’re buying? 2 years? That's your multiple.

Ultimately, think of your business's valuation multiple as an indicator that reflects risk and growth potential.

High risk or uncertain growth prospects can push your multiples in this sector down, while a strong market position or clear growth avenues can elevate it. It’s a delicate balance between demonstrating enterprise value and equity and mitigating risks.

As trusted advisors, Exit Advisory Group have helped numerous businesses successfully maximise value and navigate the complex process of selling. Whether you want to sell today or in the next few years, our advisors provide valuable insights and guidance to ensure you make informed decisions and achieve your goals. 

Speak with one of our advisors.

Can You Influence Your Multiple?

While the market has benchmarks for multiples, there are steps you can take to enhance yours. This includes reducing business risks, strengthening management, boosting profitability, and positioning your business in a niche or growth market to elevate your multiples in this sector. It's about making your business as attractive as possible to prospective buyers.  

In one of our blogs, entrepreneur Jill Nelson shared how she successfully built and sold her business for $38.8 million, achieving an unprecedented multiple. Jill focused on solving a problem for small businesses and creating a subscription-based revenue model, which ultimately drove up the value of her business. She focused on customer satisfaction and employee retention, as well as investing in proprietary technology, leading to a competitive advantage. 

By the time of the sale, her company had exceeded its goal of $10 million in revenue and had a healthy leadership team in place. This story shows the importance of building a business with multiple value drivers and using a valuation multiple as a strategy, rather than solely relying on industry benchmarks. 

At Exit Advisory Group, we don't just stop at giving you a number. As your Trusted Advisor with M&A experience, we help identify the key risks that impact your business. Your business is rated against a range of factors that identify risk and opportunities for growth and value enhancement.  

We help different companies understand what their business needs and their current cash flow, how their company is being valued, create a roadmap to increase the value of a company and find potential buyers for their business.

Quick Tip

If you’re thinking about selling your business but unsure of how to go about it, this quick guide on “How to Sell a Business” is a useful resource for business owners, people in the financial sector or any business sellers considering a sale.

Wrapping It Up: The Essence of Business Valuation Multiples

Whether you're contemplating about selling or you have a longer runway for growth, knowing your average multiples is a good starting place. It provides a broader context of your business's operating performance, equity value, industry position, and growth potential.

Understanding the intricacies of valuation multiples using valuation methodology can help set realistic expectations and guide strategic decisions towards enhancing your business’s value.

At Exit Advisory Group we help business owners maximise the value of their company and exit at the top of their game.

Here’s how we can help you:

  1. Discover what your business is worth: By understanding where you are today you can create an effective plan for business growth.
  2. Understand your exit options: There are many ways to exit a business. We'll help you choose the option that matches your business, lifestyle and personal goals.
  3. Increase the value of your company: Whether you want to exit in a specific time-frame or reach a desired valuation. We'll give you a game plan to maximise company value and achieve your goals.
  4. Sell your business: If your desired exit option is to sell, we are a licensed business broker and we can handle the entire process from creating the strategy and finding buyers all the way to settlement and transition. Find out how we do things differently to most other business brokers to get the best results.

If you need advice on how to build a valuable, scalable and saleable business, book a confidential call with one of our advisors today.

If you found this article of value, we share more tips and insights on our newsletter. Click the link below to subscribe.


Related Posts