Venture Valuation: Multiples

Question 1

What is the concept of multiple valuation? What are its assumptions?

Answer 1

Idea: derive company value from market prices of comparable companies
Assumptions: market price to performance indicator ratio is equal for comparable companies, market price represents a fair value representing all relevant information

Question 2

What types of multiples are there?

Answer 2

Industry Multiples:

• Stock market multiples
• Expert estimations

Peer Group Multiples:

• Comparable companies
• Comparable transactions

Question 3

What are the basic steps for valuing a company based on peer group multiples?

Answer 3

• target company analysis
• peer group selection
• multiple valuation
• premiums or discounts

Question 4

How is multiple valuation applied?

Answer 4

1. Calculate the average peer group multiple:
sum[all companies c]( MV_c / PI_i,c ) / C = M_Pli
// C: number of companies, MV_c: market value of company c, Pl_i,c: performance indiator i of company c, M_PIi: multiple based on performance indicator i

2. Calculate the market value of the target company
MV_i,T = M_PIi * PI_i,T
// MV_i,T: market value of target based on performance indicator i, M_PIi: multiple based on performance indicator i, PI_i,T: performance indicator i of the target company

3. Consider premiums and discounts
   e. g.:
   - package/control premium
   - illiquidity discount
   - minority discount

Question 5

What are the different performance indicators that can be chosen for a multiples valuation?

Answer 5

Equity value multiples:

• earnings
• earnings growth
• book value of equity

Enterprise value multiples
Financial:
- revenue
- EBITDA
- EBIT
- free cash flow
- book value of total capital
Others:
e.g. number of customers

Question 6

What are the two alternative ways to calculate future oriented multiples?

Answer 6

1. Use today’s multiples & expected performance indicators of the target
   - > assumes constant multiples over time
   - > calculated future value has to be discounted

Formulas:
Equity value multiples:
MV_E,T = M_PIi,0 * PI_EqV,T,t / (1+r_e)^t
Enterprise value multiples:
MV_TC,T = M_PIi,0 * PI_EnV,T,t / (1+k_wacc)^t

2. Use expected performance indicators of target and comparable companies
   - > no future value calculated -> no discounting needed

Formulas:
Equity value multiples:
MV_E,T = /* peer group multiple in regards to equity at time t */ * PI_EqV,T,t

Enterprise value multiples:
MV_TC,T = /* peer group multiple in regards to enterprise value at time t */ * PI_EnV,T,t