Why Revenue & EBITDA Multiples Matter

Valuation multiples play a key role for founders as they provide insights into the market’s current sentiment, the general perception of relative risk and an opportunity to conduct operational benchmarking.

They are often a first stage valuation technique, since they use straightforward ratios of financial metrics e.g. revenue or EBITDA to enterprise value. Assuming an appropriate basket of comparable companies is selected for the analysis, the average multiple for the sector can quickly be applied to a the company financial metrics to ultimately determine (implied) valuation for your business.

Other valuation methods either require building a financial model (discounted cash flow) or access to accurate databases of past transactions (precedent transactions) - whereas multiples-based techniques can be calculated on the back of an envelope!

Potential Limitations of Public Comps

It might often be required to use some judgement and apply a premium (or discount) to market multiples with various factors that could arise. Here are just a few illustrative points to consider during valuation analysis:

• Lack of Comparables

  Niche segments are likely to have few close peers and businesses always differ in terms of size, business model, competition, unique strengths etc.

• Geographical Limitations

  Most public tech companies are in US / Europe, so limited applicability for smaller countries (e.g. might have local monopoly strength or political risks)

• Size Disparities

  Large and small companies are likely to have varying growth profiles and therefore likely to attract significantly differing valuation multiples

• Limited Information

  Financial metrics such as revenue or EBITDA only capture a partial view of a company’s potential (e.g. no consideration on strategy or competitive advantages)

• Account Practises

  Revenue multiples are often disregarded as they ignore profitability, but EBITDA-based analysis requires close attention to one-off expenses & adjustments

Introducing Multiples

We launched Multiples in September 2023 as a free-to-use public web-based platform designed to help founders, investors, and their advisors enrich their valuation capabilities of the tech sector.

Our ambition is to bring the highest quality comps data for listed technology companies with deep sector segmentation and smart filtering to enable quick benchmarking across key industry segments.

Key Platform Highlights

Multiples has been developed to cover all key movers & shakers within the tech ecosystem, cutting the noise from irrelevant peers and not-detailed-enough segments

• 2,000 companies with extensive coverage of small-to-large caps

• 100+ granular verticals across consumer internet, fintech, ecommerce, software, hardware etc.

• 60+ countries with major players in Europe, US and emerging markets

• $35 trillion in total enterprise value (as of September 2023)

Using Multiples in Practise

Let’s take an example in the cybersecurity space to illustrate how public comps are often applied for valuation purposes. Our company (CyberXYZ) currently generating $4m in revenue for 2023 but remains to be profitable.

The company is based in the US which provides us with plenty of listed comparables, and we can use the data on Multiples to arrive at a ballpark valuation ahead of CyberXYZ’s next funding round.

We can either select close peers via the Vertical filter (“Cybersecurity”) or use the Companies Similar To filter (e.g. “Palo Alto Networks”). And given that this is a large segment, let’s also narrow down our search to cover the United States only.

The sector is currently valued at an average of 3.3x 2023E revenue, so we can apply this to CyberXYZ’s financials and arrive at an indicative valuation of $13.2 million ($4m revenue 2023 * 3.3x). If the company was profitable, we could apply the same principles to EBITDA to arrive to a theoretically more accurate measure of valuation, which takes their efficiency into account.

Get started and set up your free Multiples account today. We look forward to your feedback, so if something doesn’t work or you have some suggestions, just email us at [email protected].