Multiple (or Comparable) Analysis is a metrics based valuation method. It derives a company’s valuation by comparing its key metrics to those of similar companies. With a simple rule of three formula, any startup or mature company can be valued in seconds. The key is to pick the right metric and find appropriate comparable companies.
Multiple Analysis has many names. Multiple Valuation, Comparable Analysis, Comps, Multiples, Trading Comps, Acquisition Comps. The are multiples based on accounting data, on cash flow data and on esoteric (made up) stuff like number of Likes, merchants, users and so on if you don’t have revenues yet. Below we make sense of all of this.
Equity vs. Enterprise Value Multiples
While the formula is very simple, one needs to pick the right metric to compare a company. There are two main kinds of multiples: Equity Multiples and Enterprise Multiples. If you have forgotten about the difference between Equity and Entreprise Value, we got a detailed section on this here. But Enterprise Value is essentially the value of the ENTIRE company including all the cash flows to lenders and other non-equity stakeholders. The Equity Value can be simplified as Enterprise Value minus all debt but plus cash.
So to develop Equity multiples, one needs to base them on cash flows and metrics that are actually available to Equity holders. That is essentially net income, because net income is the only figure in an income statement that has all kinds of interests deducted already.
Enterprise Multiples in contrast can be based on all those other major profitability sums ABOVE interest payments in an income statement. That is for example EBIT (earning BEFORE interest and taxes), EBITDA or also simply Sales (= Revenues).
In the startup world, EV/Revenues is very popular for two reasons:
- Revenues are not as influenced by many diverse assumptions as any earnings sum further down in an income statement.
- Startups will have Revenues long before they have any sort of Profits
Public vs. Acquisition Multiples
When searching for comparable companies, you are forced to use information that is available to you, as not every company publishes their data. In fact the biggest challenge will be to find a reasonably comparable company given your new startup (hopefully) is creating its own new market.
Essentially there are two main choices, Public or Acquisition Multiples.
Esoteric Startup Multiples
Beyond basing your multiples on income statement metrics, many startups use non financial metrics to value themselves. This could be number of users, likes, downloads, merchants, customers,…anything. While some of these like “Likes” and “Followers” often get discarded by investors, others such as users, downloads and especially customers do show the level of engagement a new company can generate. And that can happen long before a solid revenue model has been developed or operations have been professionalized. Here is a list of non-financial multiples that others have used. Please remember these should all be Enterprise Value Multiples, as they all value the entire organisation. Just like the multiple in a Terminal Value calculation.
- EV/Repeat Users
- EV/Paying Merchants
- EV/Paying Customers
- EV/Repeat Customers
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