Valuation Using Multiples: 6 common problems and how to overcome them

How to use multiples to value a private company

Using multiples for valuation (also known as relative valuation) is the practice of comparing the price of a company to the market value of another comparable company.

There are several challenges when attempting to value a private company using valuation multiples:

Finding a comparable company

Since no two companies are identical, finding a comparable firm to properly price the asset against is difficult.

Defining the industry of the company you’re looking to value and then looking for companies in this industry who have similar revenues and profits is the only way to do this. With Pomanda's Power Search, you can filter through companies in your location and industry using different financial parameters. Or check out the similar company section Pomanda provides on your Company's Profile Page.

Finding comparable deals

Just as no two companies are identical, no two deals will be exactly alike. The price of a business will be impacted by other factors specifically related to the deal, such as the timing of the deal or the earnout conditions.

When searching for comparable deals, it’s important to consider the industry environment as a whole during the time of the deal and make adjustments for differences.

Getting deal data for private companies

When the company is a private company, it is difficult to find information on what other companies have sold for as they’re not required to report it publicly.

Services like Business Valuation Benchmarks are dedicated to finding information on M&A deals, though they can be expensive. Check out our Industry Insight Pages to see your industry's valuation multiples over time to compare.

Using public company data

If no appropriate private company data can be found, using public company data presents a challenge because public companies have different risk profiles and growth characteristics which will have to be accounted for in the valuation.

You’ll need to take into account the differences in capital structure. Public companies in the same industry tend to have similar capital structures where as private companies can have a range of structures.

Choosing a standardised value

Deciding what value to apply the multiple to can be a challenge. For example, a company with no earnings cannot use current EBITDA as their standardized value for relative valuations.

Younger companies who have little or negative profits are often valued on their future revenue.

Accounting for illiquidity

Private company stock is more difficult to sell the public stock which decreases its value as it cannot be converted easily into cash, and the amount it decreases the value of the stock is difficult to ascertain.

Adding an illiquidity discount of 20-40% to a valuation of a private company will improve accuracy.