A Quick And Dirty Multiple Valuation (With Emphasis on Dirty!)

A Quick And Dirty Multiple Valuation (With Emphasis on Dirty!)

Probably the easiest way to do a quick valuation of your business is a multiple analysis. To do so, you need to know what financial metric is commonly used to value your business. Early stage businesses are often valued using a sales multiple because they don’t have positive EBITDA (earnings before interest, tax, depreciation and amortization) yet. Software companies, such as Software-as-a-Service (SaaS) companies, are often valued using a sales multiple even if they are already publicly traded and do have earnings.

Let’s say you wanted to value your SaaS company. You would need the sales number for your business for the last twelve months. You then need to identify a handful of publicly traded companies that have comparable business models. One example for a SaaS company would be Salesforce. You want at least 5-6 comparable companies, but the more the better. Lookup their LTM sales multiple (LTM = last twelve months) on sources such as Yahoo! Finance, and calculate the average sales multiple. In the last step, multiply your LTM sales with the average multiple to receive your company valuation.

This is a very simplified and back-of-the-envelope method for companies with simple capital structures. Also, these valuations are more meaningful if you use sales predictions and forward-looking multiples, since the stock markets trade at least 6 months looking forward. And choosing the “right” comparable companies can be challenging. But for a quick (did we mention dirty!?) valuation this is an easy method every business owner can use without needing access to expensive Wall Street research reports.

Of course, if you don’t have revenues this method won’t work. In the case of a SaaS company, people use milestones and related valuation ranges that the market would accept at that time.

Or you could throw darts.

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