Multiples and Business Appraisals

It is difficult to value a Commercial property without knowing the Cap rate (or yield) and a business is no different. For a business you just call it Profit or EBIT or EBITDA. I have previously explored how Cap rates and Multiples are two sides of the same formula (click here).

So what?

I was recently reading two articles (links below) on Multiples. It is all anyone talks about in business valuations so why and should we?

Paper 1

1. Asset Valuations are easier to predict than earnings. Think of a trucking business as a good example. Lots of capital and assets employed so a heavy Balance Sheet that you cannot muck about with for tax outcomes like on a P&L. Earnings can be volatile also (P&L).
2. At least where I operate, most appraisals end up being earnings (we do both though). The best indicator of earnings values is EBITDA.
3. Sales is a terrible predictor so don't use it.

Paper 2

1. Combing current and projected multiples is more accurate than either alone and more than historical multiples also. A lot of people get hung up on past performance but it is not as accurate a predictor of values.
2. Factors cited as multiple drivers: Growth, earnings stability, earnings quality and asset utilisation.

Conclusions

1. Business valuations is more Art than Science.
2. There are no hard and fast rules but Assets are easier to predict than Earnings.
3. Don't take your eye off EBITDA.

Paper 1

Private Firm Valuation using Enterprise Value Multiples: An Examination of Relative Performance on Minority and Majority Share Transactions

36 Pages Posted: 22 Mar 2021, Stefan Otto Grbenic, Graz University of Technology, Date Written: February 17, 2021

Paper 2

Valuation Multiples: Accuracy and Drivers – Evidence from the European Stock Market

Business Valuation Review, Vol. 28, No. 4, 2009, 33 Pages Posted: 10 Jul 2011

Péter Harbula, Independent, Date Written: November 14, 2009

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