Multiples and valuations go together like meals and recipes. Just as a good meal requires an accurate recipe, you can’t build a credible valuation without using the right multiples. CFOs know multiples are the centerpiece of every valuation methodology. That is also true for the method we created, called QuickValue.
The principal differences between QuickValue and other methods are, first, using value drivers as the heart of the valuation process. Second is that QuickValue is designed to help executives determine a value for their company without hiring third-party advisors. Our previous installment in this series covered how to find your company’s key value drivers and arrive at a Value Driver Score. Here, we’ll look at the other side of the equation — pulling together your multiples.
While QuickValue is designed for privately held, midmarket companies, the process uses multiples from public companies. This information is refreshed every day the stock market is open and is easy to find. Multiples from M&A transactions are important as well but are less reliable because they are episodic — the deals occur over time. Gathering sufficient data points just from M&A to draw conclusions may require using transactions from six months or a year ago, which may not reflect current market conditions. M&A multiples are also harder to come by. Information about purchase price and EBITDA or revenue are not usually released for private M&A transactions. For these reasons, public multiples are the standard for QuickValue.
There are several straightforward ways for obtaining public multiples for your industry. You can find them yourself or enlist the help of an investment banker or other professional. Yahoo Finance and Google Finance may also have what you need. The key is to find and use the most relevant set of comparable valuations from companies that are similar to yours. Otherwise, your multiples range will be skewed.
In many cases, these public company multiples will have already been calculated for you. If not, then simply take a company’s enterprise value and divide it by its EBITDA (or revenue). A public company worth $500 million, with EBITDA of $50 million, has an EBITDA multiple of 10x.
Multiples vary widely, even for the same industry. Below are multiples for two segments of the technology industry, as an example.
QuickValue requires 15 relevant public companies in your industry. Fifteen is necessary because QuickValue, unlike other valuation methodologies, creates a valuation range rather than a median value. When medians are used, there is a tendency to apply the same median to all companies, which doesn’t account for their differences. Using a range instead of a median allows QuickValue to distinguish between top performers, which deserve to be at the high end of the multiples range, and those that belong nearer the bottom.
The next step is to rank the 15 public company multiples from highest to lowest. Then, you create a range by selecting the multiples ranked fourth and twelfth. These multiples become the bookends for your range, with the fourth as the highest, we call it the upper median and twelfth as the lowest. We exclude outliers such as those ranked 1, 2, 3 and 13, 14, 15 because they may be abnormally high or low.
This is how a ranking of 15 public company multiples might look:
Once you’ve determined your multiples range, the next step involves adjusting the range to reflect the smaller size of private companies. For example, the multiples for a company with revenue of $50 million are typically going to be lower than for public companies. That’s because the data set of 15 public companies may include ones with $1 billion or more in revenue. A good benchmark is to adjust public medians downward by 25-35%, depending on your industry. To be more precise, you can find the discount for M&A transactions by asking an investment banker who specializes in your industry.
You now have a multiples range that you can use with the Value Driver Score from the previous article (link to that article) to calculate your value. Your hard work is about to pay off. In our next article, we’ll show you how to use these multiples, in conjunction with your Value Driver Score, to determine the unique value of your company.
Reed Phillips is CEO of mid-market M&A firm Oaklins DeSilva & Phillips, and Charles Slack is a business and financial writer. They are the co-authors of the book, QuickValue: Discover Your Value and Empower Your Business in Three Easy Steps. Tables in this article originally appeared in QuickValue.
This is the third article in a six-part series about how CFOs can lead an internal team in determining their company’s value.
- Part 1: Are You Your Company’s Chief Value Creation Officer?
- Part 2: How Well do You Understand Your Company’s Value Drivers?
- Part 3: Finding the Multiples that Best Express your Company’s Value
- Part 4: Unlocking New Value for Your Company
- Part 5: Putting Value at the Center of Your Strategic Planning
- Part 6: A Q&A with Reed Phillips and Charles Slack