Valuation multiple

A price divided by something the business produces - earnings, cash flow, revenue, subscribers. A compressed way of expressing what buyers paid.

Example

An enterprise value of 20,500,000 over EBITDA of 2,000,000 is a multiple of 10.25 times.

Important

A multiple is not a shortcut past valuation; it is somebody else's valuation with the assumptions removed. Using one means inheriting every assumption inside it, including ones about borrowing costs that are not properties of your asset.

Related terms

  • Comparable companies — Businesses similar enough to the one being valued that the prices paid for them are evidence about its price. Similarity means growth, margin, capital intensity and customer concentration - not industry label.
  • EV/EBITDA — Enterprise value divided by EBITDA - the most common multiple for comparing whole businesses, because both parts are calculated before the effects of borrowing.
  • Price-to-earnings ratio — The price of a share divided by the earnings attributable to it. An equity multiple, because both parts are measured after interest has been paid.

Lessons that explain it

  • The multiple is a discount for size, concentration and dependence on one person — There is no exchange setting a price here. The multiple applied to SDE is a negotiated number that moves with customer concentration, revenue durability and how replaceable the owner is - and it sits far below public-market multiples for reasons that have nothing to do with the quality of the business. (11 min)
  • A revenue multiple for a young company needs three adjustments — Once a startup has revenue, it is often valued as a multiple of it. Borrowing public or late-stage multiples requires adjusting for growth, size and illiquidity before the number means anything. (11 min)
  • The price is whatever the last round negotiated, and preferred is not common — Between financings there is no price at all, only the last round's number carried forward. And the price paid for preferred stock buys something a common shareholder does not have - which is why two shares issued in the same round at the same price are not worth the same thing in every outcome. (11 min)
  • Comparables and multiples: what the market is already paying — A multiple is not a shortcut past valuation. It is somebody else's valuation, compressed into one number, and using it means inheriting every assumption inside it. (12 min)

All 578 terms in the Investing glossary