A valuation should ideally be supplemented with market value methods (multipliers, multiples) to check plausibility. This involves analyzing prices payed in past transactions (transaction multiples). This approach brings theory and practice closer together.
Market Value Method (multipliers, multiples)
In the case of publicly listed companies, the corporate value can be compared with the prices paid on the stock exchange (trading multiples) or with the acquisitions, transaction prices (Transaction multiples) where paid prices are known to the public. Trading multiples and transaction multiples are summarized under the term of market multiples (multipliers). Important Market multiples are revenue, EBITDA, EBIT, net profit multiple, the price-earnings ratio (PER or P/E ratio) or the Market-to-book ratio, where the multiples are always a multiple of the indicated key figures. Applying multiples of stock traded companies in the context of private companies can prove to be relatively difficult. A comparison may be of use to establish a price range.
Enterprise value according to Sales multiple
= Sales × Sales multiple
Enterprise value according to EBITDA multiple
= EBITDA × EBITDA multiple
Enterprise value according to EBIT multiple
= EBIT × EBIT multiple
Net assets (net = Equity) according to Net profit multiple
= Net profit × Net profit multiple
Calculation of multiples
With the multiple-evaluation it is important to start from the same base. Either one rates at the corporate level (enterprise value, gross, unlevered) or at the equity level (equity value, net, levered). It is also useful to form an average of the respective multiples, so as to balance a possible bias or offset. Moreover, it makes sense to form an average over several years for each multiple used.
Owner’s profit (at EBITDA level)
Particular attention is given to the important EBITDA Multiple. EBITDA stands for Earnings before interest, tax, depreciation (fixed assets) and amortisation (on intangible assets). This represents an important tool in corporate valuation especially for small and medium-sized companies. This multiplier is independent of the financing structure and investment cycle and therefore one of the most meaningful multipliers. A company that has just made significant investments finds itself confronted with a higher depreciation and a lower profit than a company that has made no investments over a longer period of time.
The owner’s profit based on the EBITDA represents the actual cash flow generated for corrections. If the gross salary (including benefits) of the owner is added to the EBITDA, this results in the owner’s profit which can be used according to the owner’s disgression. Multiplied by a certain factor, this represents a fundamental price indicator in particular when evaluating small and medium-sized companies, where a DCF valuation may not make much sense. The origin of the term: owner’s profit (EBITDA) or owner’s cash flows is an Anglo-American term. Usually the owners themselves are active in the company and will benefit from various discretionary expenses paid for by the company. If he/she were a regular employee, he/she would have to finance for such spending out of his salary.
Calculation of the owner's profit at EBITDA level
The starting point for calculating the owner’s profit at EBITDA level is always the EBITDA according to the financial statements. To which the following adjustments or corrections are to be made:
EBITDA according to the financial statements
- Addition of the gross salary of the owner or owners (including bonuses, bonuses and benefits)
- Addition of additional charges which are not included in the gross salary
- One-off addition/subtraction, non-recurring expenses/revenues, which were debited/credited to the P&L account
- Addition/subtraction income/expenses not operationally required, which were debited/credited to the P&L account
- Addition/Subtraction formation/release of hidden reserves
- Addition/Subtraktion Bildung/Auflösung von stillen Reserven
- Addition of easily and quickly realisable savings
= owner’s profit at EBITDA level
The experience of Business Broker AG
With over 740 sales of companies over the past years, Business Broker AG has built up a very valuable database in terms of multiples, which are actually paid in the area of SMEs. Of course, this requires a prior adjustment of the financial statements as discribed above.
More information and documents can be found in our toolbox