Multiplication method – simple and plausible

The multiplier method is used for company valuation because it is very simple.

According to the multiplier method, the company value is calculated from the EBIT multiplied by a factor. This factor (the multiple) is an empirical value that depends on the industry and the size of the company. You can find ranges for such multiples in continuously updated directories, for example at Finance Magazin at Multiples increase if the company is relatively large, if it has few investment backlogs, if it has unique selling propositions and if the business does not depend on a few managers.

Common EBIT multiples range from 4.5 to 8.0.

Example: If a company generates reliable EBIT results of EUR 100 thousand and the multiple is 7 according to Finance Magazine, then the enterprise value is EUR 700 thousand.

The multiplier method neglects detailed information relevant to valuation, but can certainly be used to check the plausibility of company values that have been determined using other methods. Compare the result from the above example with the result from the capitalized earnings valuation method.


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