Many business and company owners may be aware that a common business valuation method involves applying a multiple to the earnings or profit of a business. So how do valuation multiples for businesses work and what valuation multiple is correct for your business? This article provides a high level overview of multiples and how they work for the valuation of businesses.
What is a Multiple?
A multiple is a number which is applied to a business’ profit or earnings in order to calculate the value of that business. In simple terms, it may be the case that a particular business should be valued at 2 times its profit. In this case, the number 2 is the multiple.
How do you determine a multiple?
Determining multiples is part science and part experience. Typically, the best way to determine a multiple is to look at market transaction information from the sale of similar businesses, as this will show you what multiples have been applied to sales of similar businesses to yours. This ensures that the business value produced by your multiple will be consistent with how other similar businesses are valued.
It is a fact though that no two businesses are the same. This means that beyond simply looking at market information it is vital to also consider the risk profile of the specific business that you are valuing. If the business has significant risks, then the multiple will be lower than if it has minimal risks. In other words, higher risk businesses have a lower value than lower risk businesses.
Are there standard multiples that can be used?
Normally there are no fixed standard multiples which are widely accepted for business valuations. There are however multiple ranges which are often accepted within specific industries or for specific business types, with the exact multiple normally subject to a review of the specific characteristics and risk profile of the subject business. It is important to consider if there is an acceptable multiple range for your business’ industry, and how it may impact on the value of your business.
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Groves & Partners are expert valuers of businesses, companies and shareholdings. Our expert valuers include Chartered Accountants and Registered Business Valuers. We have significant experience in determining the appropriate multiple for the valuation of businesses.