Multiple for valuation! Any idea how to come up with it?

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May 02, 2020

by a searcher from University of Massachusetts at Boston in Shrewsbury, MA, USA

I'm looking at some business that sell between a 3-5 multiple, However, I want to be more accurate when giving these businesses a multiple. So, instead of just making a educated guess and saying that a particular business has a 3.5 x multiple, how do I come up with a better way to give these businesses a more accurate multiple. Say for example, maybe I use a scorecard.

Does anyone have experience doing this? Does anyone have a template that I could use?

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commentor profile
Reply by an intermediary
from Wake Forest University in Winston-Salem, NC, USA
Hi Bradley -

One place to start is with comparable multiples data from companies that have sold that in the same industry and of similar size. I like PeerComps and then DealStats (from BVR, formerly called Pratt's Stats). Both are based on closed transactions. I find PeerComps to be better scrubbed (given its data source is banks). But depending on size and industry, may need to look in DealStats too. Be careful of databases that are not thoroughly scrubbed or are based on listing/asking prices (BizBuySell and MNAdata come to mind). Also, each data set comes with its own rules and treatment of whether or not inventory, AR and AP, etc. (i.e., Net Working Capital) are included in the Purchase Price or not, so you have to dig into each one's specifics so that you aren't coming up with a multiple and price that includes NWC and applying it to a situation where the deal doesn't, and vice versa.

Here are some good threads on the subject and other sources:

https://www.searchfunder.com/post/industry-specific-small-business-multiples

https://www.searchfunder.com/post/does-anyone-have-a-recent-source-for-small-business-multiples-by-industry
commentor profile
Reply by a searcher
from University of Iowa in Denver, CO, USA
Before diving into comparables, I'd suggest giving it a shot on your own then enhancing your model based on what you may have missed with comparables. This exercise pushes the need for macroeconomic research/understanding. How has the target done in economic hardship conditions, is it well-positioned for another storm, etc. Use these projects to build a library so you can pull an industry off the shelf, update, and consider again.

Additionally, keep in mind that some acquisition models include "multiple arbitrage" that feeds into the exit strategy section of the plan. Make sure the multiples you're pulling do not include that as it is highly variable.
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