A value, typically expressed as a factor, used to multiply a business economic benefit to arrive at the business value.
What It Means
Valuation multiple is a multiplier used to convert a single-point business economic benefit into the business value. The typical economic benefit used in business valuation is a measure of business earnings such as the seller's discretionary cash flow (SDCF). Note that the Valuation multiple is the reciprocal of the Capitalization rate.
Business value estimation as multiple of discretionary earnings
Valuation multiples are incorporated into the Multiple of Discretionary Earnings income-based business valuation method. The multiples are calculated based on the assessement of a set of financial and operational factors.
Business Valuation as Multiple of its Earnings
Market-derived business valuation multiples
Valuation multiples derived from similar business sales are often used to estimate the likely selling price of a business. These multiples are calculated as ratios which relate some measure of business financial performance to its potential selling price.
Valuation Multiples by Industry
Typical valuation multiples used in business appraisal
The most popular multiples are:
Other common valuation multiples that are also used rely on well-known accounting measures, for example:
Valuation Multiples based on Revenues, Profits, Assets
Business selling price estimation
You can use these multiples for quick estimation of your business selling price. For example, take the Price to Gross Revenue multiple and multiply it by your business gross revenue.
Using several valuation multiples
To get a comprehensive idea of your business fair market value, consider using a number of valuation multiples at once. The business value results may differ depending upon the business revenues, profits, asset base, cash flow or equity.
For an example of how market-derived valuation multiples are used for business selling price estimation, please see the Valuation Guide article on estimating business market value.
Business Selling Price based on Valuation Multiples
Business Valuation Tools