Valuing a business through Multiples

If you are looking to sell your business, or indeed to acquire one, it is important to know what the business in question is worth. So-called market multiples often play a role in the valuation of a business.

Multiples

EBITDA multiples are regularly used in company acquisitions. This involves multiplying the EBITDA (operating profit plus depreciation) by a specific factor to arrive at the value of the company. This factor is known as the ‘multiple’. The multiple is determined on the basis of recently completed transactions involving similar companies; the multiple is calculated by dividing the company’s value by its EBITDA. Factors influencing the multiple include the sector and the size of the company.

Sector-specific multiples

When looking at sector-specific multiples, it is striking that these can vary considerably from one sector to another. For example, the multiple for companies operating in the manufacturing sector is higher than that for companies operating in the construction sector. These multiples are thus shaped by factors specific to each sector. These may include global trends, such as how the healthcare sector has been viewed since the Covid-19 pandemic, or rapid developments in the field of software and IT. Furthermore, recurring revenue is, for example, more common for a telecoms company than for a car dealer (factors such as these are also reflected in the level of the multiple). Of course, there are many more factors at play. Below is a table showing the EBITDA multiples per sector as determined by Brookz (2023). The average EBITDA multiple for Dutch SMEs was 4.7 at the end of 2022.

Multiples depend on size and company-specific factors

The size of a company also influences its enterprise value. As a general rule, the larger the company, the higher the multiple.

A multiple also depends on company-specific factors. These include dependence on specific customers or suppliers, the company’s track record, or a strong dependence on the director and major shareholder. It may also be the case that certain employees possess a great deal of knowledge and that, should an employee leave, a significant amount of knowledge is lost all at once.

See the table below for an overview of average EBITDA multiples in relation to company size, according to Brookz (2023).