Applying the multiple to your target
- Calculated the average or mean of the multiples – see Precedent Transaction Comps or Public Trading Comps
- Apply discount or premium to your multiple – see Precedent Transaction Comps or Public Trading Comps
- Apply premium to your target
Assuming the mean revenue multiple is 1x, and the target had $20m in revenue, then the value of the target is $20m.
Assuming the mean EBITDA multiple is 7x, and the target had $5m in EBITDA, the value would be $35m.
So based on these two multiples, the value of the company would range from $20m to $35m.
Be sure to the timing of your multiples and your targets numbers are correct. For example, using forward looking multiples and LTM revenue will give you misleading numbers.
Variation within the range
There would be more variation as you consider where the target’s multiples should fall within the range of the compset. If it has a higher EBITDA margin than it’s peers, then it deserves a higher EBITDA multiple.
Again this is where the art of valuation comes in to play.