What Is A Multiple?

I am often asked, “what is my company worth?” or “what multiple can I get for my company?” Of course, a truly thoughtful answer to these questions requires an in-depth understanding of their particular business. However, most M&A professionals use a “multiple” when discussing a sale valuation. Although the use of “multiples” may create an acceptable answer to a potential seller, it can be one of the most misleading metrics we can give our clients.
So why does everyone, even the experts, use multiples to describe valuation? Simply put, they are very easy to understand. Multiples are nothing more than the result you get by dividing a company’s sale price by some other financial result of the company such as sales or an earnings metric. Probably the most common multiple used for mid-market companies is a multiple of earnings before interest, taxes, depreciation and amortization or EBITDA.
Unfortunately, predicting the sale value of a business is a complex proposition with many internal and external variables and assumptions. Each business sale is unique and so is its resulting sale price. This is why, if we were to look at two companies that appear to be very similar, they could have very different outcomes in a sale.
Sale price variables include historical sales and profit growth rates, projected future growth rates, consistency of results, industry, the management team pre and post sale, the other human resources of the business, its property, plant and equipment, its customer list, competition, the number of active buyers in the market place, free cash flow … and on and on and on! I think you now see why multiples are used in discussing a sale value range.
An M&A professional, after reviewing some key elements about your business and having an understanding about the current M&A market, can use a multiple as a guide to give you some idea of sales price range. However, always remember, that the true sale value of your business is the price a willing buyer will pay a willing seller in an open market environment.

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