Business Valuation - Multiplier Method

In the multiplier method, the company value is calculated by multiplying the chosen reference size by the corresponding multiplier. The method is also suitable for SMEs, as no complex forecasts need to be made.

Reference Size and Multiplier

The company value is calculated in the multiplier method by a simple multiplication:

Company Value = Reference Size x Multiplier

As reference size, key figures and sizes from accounting are used. In principle, there are no limits to the creation of new multipliers. It is crucial that the reference size reflects the primary value drivers of the respective industry. The most frequently used is EBIT, which is the profit before interest and taxes. However, as a reference size, the sales area of a retailer can equally serve. The identification of the multiplier also depends on the industry and is calculated from the available data of comparable companies. Criteria for determining similar companies include company size, products, customer segment, gross margin, number of employees, and growth rate. The SME portal of the Federal Government provides a rough overview of the multipliers of the respective economic sectors, all using the adjusted annual profit as the reference size.

Advantages and Disadvantages

For the application of the DCF method, where future financial surpluses are discounted, especially in SMEs there is often a lack of reliable data for the forecast period. In contrast, no forecast data is necessary with the multiplier method. Moreover, the procedure is simple in application and easy to understand. One drawback of the method is that it involves the valuation of the company based on just a single size. Often, this size is also related to a specific point in time (static) and thus not capable of representing future developments. Moreover, no particularities from the companies being valued are considered.

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