Private Company Valuation Multiples

Updated: May 31, 2024

Key Insights

As a buyer or seller, performing a valuation analysis from the counterparty’s perspective creates a defined, supportable basis for anchoring deal pricing and strengthening negotiating power.
Precedent transactions or anecdotal evidence in the industry should not be relied upon as a sole benchmark in determining a desired transaction multiple.
Several qualitative and quantitative factors that drive value differently on a case-by-case basis must be assessed.

Where do they come from?

In M&A we often hear about “multiples” associated with a recent transaction. A multiple can be in the form of enterprise value divided by EBITDA, revenue, or any other industry-relevant benchmark (e.g. EBIT in industries where depreciation approximates annual CAPEX). But where do the multiples come from? Private business owners often have multiple expectations in mind prior to a transaction taking place. These multiples typically come from precedent transactions reported publicly, perceived industry standards based on word-of-mouth, or backed into based on individual transaction price expectations.

From a technical standpoint, a valuation process based on multiples is backward and should be used with caution. CBVs and business buyers perform in-depth valuation analyses to assess businesses' enterprise value, from which a transaction multiple is inherently derived from relevant metrics. The multiple is an output, not the starting point. Underlying valuation analyses consider the specific facts, and circumstances of the business qualitatively and quantitively as well as M&A and capital markets conditions relevant to the business

Key Considerations

Precedent Transactions – Precedent transactions in industries with M&A activity are useful for valuation analyses but in private markets generally, there is a lack of complete financial and qualitative data for reliable analysis purposes. Reliance on precedent transactions as a sole benchmark for exit multiples that haven’t been assessed for comparability and deal dynamics is risky. It’s also important to remember no two businesses or deals are the same and inherently there are non-public factors affecting the deal value and implied multiples not readily known or available. Whether multiples are based on past or future results is a material distinction in their use and reliance.

Qualitative Considerations – Transactions involving businesses with a similar product/service and geographic reach may occur at materially different deal multiples arising from differences between growth and risk profiles. Several qualitative factors influencing value include growth prospects, management experience, customer diversification, supply chain reliability, financial reporting and risk management processes, post-closing commitment, and many more. Together these factors are used to determine the reasonability of cash flows and cost of capital in a valuation analysis.

Quantitative Considerations – Cash flows are the fundamental underlying driver of value. Other value drivers include growth trends, profitability margin trends, normalizing earnings, capex requirements, working capital requirements, capital structure, interest rates, public equity returns, and more. Industry-specific nuances or metrics should always be considered which may impact the valuation analysis.

Purchase Price Premiums or Discounts – These refer to the amount paid above or below the fair market value of a business derived in a notional valuation, pricing analysis or take-private transaction. Notional consideration of special interest purchaser benefits is inherently limited and value arising from special purchasers is implicit only in negotiated transaction values and with sufficient transaction detail. Similarly, transactions may have embedded discounts for buyers acquiring assets in a distressed situation in need of liquidity or due to the liquidity needs of shareholders.

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