Company valuation on the basis of so-called "multiples" or "multipliers" (also called Comparable Company Approach)
In the practice of market-oriented company valuation, a distinction is made between two types of multiples or multiplier procedures. The two market-oriented valuation methods differ in the origin of the underlying data:
- Stock market multiples: Ratios based on the stock market prices of comparable listed companies.
- M&A multiples: Ratios based on purchase prices paid in corporate acquisitions (M&A transactions).
When calculating the value of a company on the basis of stock exchange multiples, the user should consider the following aspects:
Is the stock market price meaningful? This tends not to be the case with less liquid securities. Number of companies that serve as the basis for calculating the stock market multiple (the so-called peer group): is the number large enough, are the companies comparable?
When calculating the enterprise value based on M&A multiples, the user should consider the following aspects:
The purchase prices paid are often not published when buying/selling a company; the choice is thus usually very limited and the comparability with the company being valued is difficult for the outsider to see. These purchase prices are a result of a negotiation process.
Other parameters play a role in the negotiation process. These are, for example: transaction structure, guarantees/ warranties, etc.. Depending on which transaction structure was chosen, the purchase price paid is higher or lower and thus no longer directly comparable; this is usually not recognisable from the outside.
The same applies to the number and complexity of guarantees, warranties and many other parameters in the purchase agreement (SPA).
Application of the multiple methods
Key figures, such as EBITDA, of the company to be valued are set in relation to the enterprise value. The enterprise value differs between the total enterprise value and the value of the equity capital (equity value or market capitalisation).
The relevant value for a shareholder is the equity value, which is calculated as follows: Enterprise Value less financial debt and plus surplus cash (often considered simplistically, as all other non-operating assets must also be taken into account).
Furthermore, when comparing the company to be valued with the comparable companies (peer group) or comparable M&A transactions, the financial and asset structure must also be included.
In M&A practice, the following multiples or benchmarks are used:
- P/ E ("Price/Earnings") or P/E ratio ("Price/Earnings ratio") -> Equity Value
- Price/ cash flow (purchase price in relation to cash flow) -> equity value
- EV/ EBIT -> Enterprise Value in relation to EBIT
- EV/ EBITDA -> "D" stands for "depreciation", "A" stands for "amortisation" of goodwill. Objective: one-off effects should not lead to distortions. This EBITDA multiple is often used in M&A practice.
- EV/sales (enterprise value in relation to sales revenue): a key figure frequently used in M&A practice.
Any company valuation using multiples such as the EBITDA multiple as a reference value should use several, different multiples as a basis. In addition, a company valuation should use the methods recognised by the Institute of German Certified Public Accountants ("IDW"):
DCF method and capitalised earnings method. The different results of all methods of business valuation give the user a good picture of the range of possible purchase prices as well as possible upper and lower limits in contract negotiations. Procedure for preparing a business valuation in practice.
KP TECH Corporate Finance (Germany, Austria, Switzerland)
As an owner-managed and independent management consultancy, KP TECH Corporate Finance specialises in Mergers & Acquisitions advisory. Our clients benefit from more than 20 years of experience in international M&A and corporate finance consulting. The focal points of our consulting are the topics: Company sale, Company acquisition, Company valuation, Company succession and Private Equity advisory. Offices: Munich, Frankfurt/Main, Duesseldorf and Berlin.
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