Methods of business valuation: multiplier approach

The company value forms the foundation for the sales price negotiations when selling a business. In addition to the Discounted Cash Flow, earnings value, and liquidation value methods, the multiplier method can also be used to determine the value of a company.

Multiplier Method

In the multiplier method, it is assumed that similar companies in the market have a similar value. Therefore, for business valuation, the sales prices of sold, similar companies are used, which are then divided by a profit metric such as EBIT (earnings before taxes and interest) or EBITDA (earnings before taxes, interest, and depreciation). To obtain the company value, this number must then be multiplied by a multiplier. In practice, the revenue multiplier (equity/revenue), the EBIT multiplier (equity/EBIT), or the EBITDA multiplier (equity/EBITDA) are primarily used for this. However, for the multiplier method to be applicable at all, the necessary parameters for the valuation of both companies must be known and identical. The multiplier method offers a practice-oriented and relatively simple way to determine the company value, however, it is mainly used for plausibility checks due to the rather imprecise results.

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