Valuation Using Multiples

Valuation using multiples relies on comparing your company’s financial metrics to similar businesses. Instead of forecasting far into the future or building complex models, this method uses known industry multiples—like EV/EBITDA or P/E (Price-to-Earnings)—to calculate a company’s enterprise or equity value.
Key Multiples Used:
EV/EBITDA: Compares the Enterprise Value to Earnings Before Interest, Taxes, Depreciation, and Amortization.

P/E (Price-to-Earnings): Compares the Equity Value (or share price) to Net Earnings.

These multiples are widely published in financial databases or derived from comparable public companies in the same industry.

How Does It Work?
Choose a Forecast Period: If you expect income growth over time, define the number of years to project ahead.

Select a Multiple: Based on your industry (e.g., SaaS, manufacturing, retail), pick an appropriate EV/EBITDA or P/E multiple—typically between 4 and 10.

Input Expected EBITDA or Earnings: Use either current or projected earnings. For cyclical businesses, an average may be more realistic.

Apply Discount Rate (if forecasting): To estimate present value from a future value, use a discount rate that reflects business risk—typically 10–20% for stable startups, and up to 50% for riskier ventures.

Calculate Valuation: Multiply the earnings by the multiple and discount (if applicable) to arrive at your valuation.

Example
If your startup is expected to generate $1M EBITDA in 3 years, and similar companies have an EV/EBITDA multiple of 5, the future value is $5M. If you apply a 20% discount rate over 3 years, the present value is around $2.9M.