The Myth of the Multiple

The most common question we get asked by owner managers considering selling or buying a company is “what are the typical multiples being paid”. This initiates a collective groan within Prism because it pre-supposes that there is a common multiple.

Two businesses earning similar profit do not attract the same multiple. The quality of the earnings are key, which in effect introduces the concept of RISK into the valuation. Clearly a business built on long term contracted revenues will be worth considerably more than one relying on the irregular sale of hardware for instance.

The question also falls down on the concept of earnings. Precisely which earnings figure are we to use? Earnings before tax? Adjusted? EBITDA? EBIT? Historic or Forecast? Without a real understanding of the earnings used the multiple becomes an irrelevance.

Even with two very similar businesses, the valuations often differ substantially, based on timing, sentiment, the suitor (and the synergies they can extract) and not least the sale process itself. We run half day seminars to address the myriad of factors involved in maximising the value on sale. We would love to see you at one of these events – but at the very least please don’t ask us for a typical multiple and expect a simple answer!

By Peter Watson, Prism Corporate Broking