This article is taken from our quarterly bulletin, Canadian Overview, published by Canadian member-firms of Moore North America. The articles in our bulletin are a part of our mission to become the ultimate ally in your success by keeping you informed about current events.
Valuation multiples are commonly quoted in the media in connection with public equity prices as well merger and acquisition activity. These valuation metrics, in particular revenue and EBITDA multiples, appeal to private business owners as they are easily understood and applied to derive an estimate of value for their own businesses.
However, users often do not understand the issues relating to comparability of highly liquid public company shares and illiquid privately held companies and how to address those differences in the multiple selection.
Furthermore, users often do not understand the theory underpinning use of a multiple and hence the limitations of their use. Users also often do not understand the underlying assumptions implied by each type of multiple (enterprise value vs. equity multiples; revenue and EBITDA vs. earnings, cash flow and book value multiples) as well as the circumstances in which each is most appropriate and most commonly used.
As a result, use of multiples in performing valuations is not as straightforward as often perceived, is often highly subjective and is an exercise that must be undertaken with caution and diligence.
Contributed by Segal LLP. Connect with Segal’s Valuations team to learn more. This document was written for our quarterly bulletin, Canadian Overview, published by Canadian member-firms of Moore North America.