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 assessment of a set of financial and operational factors.
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.
Typical valuation multiples used in business appraisal
The most popular multiples are:
- Selling price divided by business gross revenue
- Selling price divided by business net sales
- Selling price divided by cash flow, such as
Seller’s Discretionary Cash Flow or Net Cash Flow
Other common valuation multiples that are also used rely on well-known accounting measures, for example:
- Selling price divided by EBITDA, EBIT or net income
- Selling price divided by gross profit
- Selling price divided by the book value of business assets
- Selling price divided by the market value of total business assets or fixed assets such as Furniture, Fixtures and Equipment
- Selling price divided by the value of owners’ equity
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.