You’re thinking of acquiring a certain company. But how do you arrive at the right bid? With so-called multiples, you can make a quick assessment of the market value of the company you are interested in. Multiples are the most commonly used method for the valuation and price-setting of companies. Multiples are also known as relative valuation or market-based valuation. What you actually do is compare an interesting company with other companies in the same sector with the help of financial ratios. Multiples are also known as rules of thumb in the Netherlands. A takeover bid can also be determined on the basis of a company valuation. This can be done on the basis of a percentage of the annual turnover, multiply a factor by the result after tax or a factor by the EBITDA.
EBITDA versus EBIT
EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortisation. In particular, companies that grow quickly and/or have a lot of debts due to acquisitions prefer to use the EBITDA. This is because the results of these companies after taxation are often negative and sometimes even too negative.
EBIT stands for Earnings Before Interest and Taxes. In other words, the turnover minus the costs incurred to achieve this turnover. This may include, for example, staff costs and purchasing. Taxes, interest payments and/or interest received are therefore not taken into account in the case of an EBIT.
Pitfalls with multiples
A multiples valuation can therefore give a quick and quite reliable indication of the value of a target company. That is, for those who have mastered the art of working with multiples. For those who are less familiar with multiples, there are a few pitfalls to bear in mind:
- Companies vary in their product range, but also in the target groups they focus on. This makes the composition of a group of comparable companies very difficult.
- Prices for mergers and acquisitions do not always come about in a rational way. A considerable number of comparable transactions are needed to figure this out.
- The future value of a (starting) company is heavily dependent on the management team. The shares are also not so easy to trade as they are in the case of a listed company. That’s why an adjustment factor always has to be applied to the value.
Do you need professional support?
It is important to realise that multiples are rules of thumb that you have to apply with the necessary know-how. Would you like our professional support with a valuation assessment and a takeover bid? Get in touch and let us know how we can help you. You can find our contact details here.