The Multiple Of What? 4 Valuation Considerations

By Tom Schramski, PhD

Volume 1 Issue 14, August 5, 2014

As we discussed in our last issue, much of the middle market valuation multiple data reported in financial publications is suspect for a variety of reasons, especially as it relates to healthcare companies.  Your responses in the past two weeks challenged the assumptions of recent reports on rising multiples with very specific examples.  Your questions raised another basic one:

What is being multiplied to create a valuation estimate at transaction or otherwise?

Here are four considerations to keep in mind when reading about multiples:

  • The multiples identified are typically (not always) multiples of EBITDA, which is not a Generally Accepted Accounting Principle (GAAP) and thus open to interpretation without lack of independent verification.  In addition, as more than one reader pointed out, multiples can be significantly affected by many different factors, especially product-centric companies compared to service-oriented entities.
  • The larger and more sophisticated the middle market business, the more likely there are to be complex approaches to estimating EBITDA with increased room for interpretation.
  • As we previously noted, the reporting of multiples covers a vast revenue range ($10-250 million annual revenue) of very diverse companies based on a limited number of transactions that samples poorly from a vast marketplace.
  • The perspective on multiples varies considerably by type of buyer, ranging from large strategic and financial buyers to modest individual investors who may be looking for a combination of a job/career and a long-term investment for their family. To paraphrase Margaret Wolfe Hungerford’s famous quote, to some extent, value is in the eye of the beholder.

The elusive character of EBITDA multiples points to a fact that most of us ultimately know:  it’s not the EBITDA or multiple per se that drives value, it’s what’s underneath the hood of the business and what the seller is trying to accomplish.  Sophisticated buyers approach a potential acquisition the same way and are trying to predict how an acquisition makes sense from a similar perspective given their existing operations and their investment objectives.

As a seller, if you know your goal and build the value to correspond, the multiple of EBITDA issue will reflect it.  There will be more on that in our next issue.