Multiplier Approach (Comparable Value Approach)
The multiplier method is one of the most commonly used methods in business valuation. It is a combination of various mathematical calculations used to determine the value of a business. Due to its simplicity and potential for detailed analysis, it is a popular method for valuing businesses.
Basically, the multiplier method consists of four main steps: First, a reference value is determined by multiplying the company’s earnings or revenue figures by the corresponding industry multiplier. Then, the reference value is compared with the company’s growth over the past few years. This allows one to determine whether the company is following a positive or negative trend. Finally, factors such as risks and opportunities, as well as business-related considerations, are taken into account to reach a conclusion.
Overall, the multiplier method is an effective way to simplify company valuations and establish a range of values. It enables investors to make informed decisions about investments and other financial transactions. However, the accuracy of the method depends heavily on the parameters used; therefore, it is important to always have precise data available to avoid potential errors in the valuation. You can find current industry multiples in our SME Multiples.