EBIT Multiples in Enterprise Value Calculations
What is your company worth? A common method for estimating value isthrough so-calledEBIT multiples, which reflect the earnings multiple based on the industry and size of the company. Banks and consultants regularly refer to these multiples when a sale is on the table. The current DUB SME multiples are published regularly by the Deutsche Unternehmerbörse, its partners, and FOM Berlin.
About the DUB SME Multiples
However, most tables have a shortcoming: the EBIT factors shown there refer to publicly traded companies, which have little to do with the market price environment of Germany’s numerically most significant segment—SMEs (small and medium-sized enterprises) in the value range between EUR 1 and 10 million and tend to be significantly higher than those for SMEs. This often leads to serious misjudgments by owners, sometimes with grave consequences.
Multipliers for Determining Enterprise Value
Price ranges (min./max.) are specified for each industry sector; that is, the majority of companies operating in the respective industry fall within the range indicated. Nevertheless, in justified individual cases, prices may fall outside the specified range. When assessing the appropriate multiple yourself, you should consider the company’s specific characteristics, such as: Dependence on the owner relative to competitors, dependence on or independence from individual customers, the ability to leverage unique selling points and differentiating features in the competitive landscape, and growth potential compared to competitors.
Enterprise value is not the same as equity value. To calculate equity, interest-bearing liabilities must be deducted from enterprise value. These must, after all, be repaid to the lender or assumed. Cash that is not required for operations, on the other hand, can be distributed to the shareholders. The remaining portion is available to the shareholders as equity.
Determination and Adjustment of EBIT
When determining enterprise value using the multiplier table, the sustainable future EBIT (Earnings Before Interest and Taxes) must be projected. Past profits can serve in this context only to validate the plausibility of expected future profits; however, they do not in and of themselves justify the enterprise value.
Likewise, sustainable EBIT must be adjusted for so-called owner-specific factors. This is often the case when family members work for the company under terms that deviate from market norms. Is the private vehicle fleet billed through the company, or is the rent paid to the holding company for the property in use in line with market rates? For example, if a salary significantly above market rates is paid to the managing partner, the difference between that salary and the market rate must be added back to the EBIT. A typical salary range for salaried managing directors of SMEs is often between EUR 80,000 and 120,000, depending on the size and profitability of the company.
Finally, when calculating adjusted EBIT, it is particularly important to ensure that, when considering a partnership (e.g., GbR, GmbH & Co. KG, etc.), the active owner’s work and salary are not included as expenses in the income statement. To ensure comparability with a corporation (GmbH, AG, etc.), the EBIT reported in the income statement for a partnership must always be reduced by the managing partner’s salary before applying the EBIT multiple, as this factor alone would otherwise systematically result in an inflated enterprise value.