What are the most common multiples used in valuation?

For this one we’re going to go through the common multiples and situations in which you would use them.

Enterprise Value (EV) / Revenue: You’ll typically have these be used for high-growth, high-retention software companies. For more detail that you won’t need to know for an interview, the reason that this happens is since software revenue is subscription based it is highly predictable. Predictability leads to an ease of forecasting and essentially provides a “base” of revenue with the below line items both highly configurable for an acquirer and that do not necessarily scale with revenue. In other words, there is a strong path to profitability and a way to adjust operating expenses to improve profitability.

Aside from software, you’ll really only see this for unprofitable, but high growth businesses that have significant strategic value. Think an AI-startup with high capital costs but a path to profitability, or a Biotech startup that could easily find profitability within a larger organization’s distribution network.

Enterprise Value (EV) / EBITDA: The most common valuation method. The reason you don’t use EV / Net Income is because Interest, Taxes, Depreciation and any other below the line costs are not core to the function of the business and could change drastically in the hands of an acquirer. Debt also gets swept in a transaction, so that already changes the interest part!

EV / EBIT: You’ll use this for companies without material D&A, but honestly it’s not market at all. For businesses I’ve worked on with negligible D&A, we’ve still dealt in EBITDA terms given that’s the market standard.

Price / Earnings: This is most useful when comparing public companies to each other, or when pricing an IPO.

Price / Book Value: This is used to find undervalued stocks.