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Understanding Valuation Multiples FAQs
Review our list of understanding valuations frequently asked questions below.
How are EBITDA, SDE, and revenue multiples used in business valuation?
Valuation multiples are tools used to translate a company’s financial performance into an estimate of its market value. Common multiples include EBITDA (earnings before interest, taxes, depreciation and amortization), SDE (seller’s discretionary earnings) and revenue. EBITDA multiples are most frequently used in mid-market and institutional transactions because they normalize earnings and remove non-operational noise, offering a clearer picture of operating performance. SDE is often applied to smaller, owner-operated businesses since it accounts for the total financial benefit available to a single full-time owner-operator. Revenue multiples are used when profitability data is inconsistent or unavailable, typically in early-stage or rapidly growing businesses. Each multiple is applied to the relevant metric to produce an enterprise value estimate, which is then adjusted based on working capital, debt and other specific factors.
How do industry benchmarks and variations affect valuation multiples?
Valuation multiples are not universal—they vary widely by industry, company size, growth prospects, customer concentration and risk profile. For example, a SaaS company with recurring revenue and strong margins may command a higher EBITDA or revenue multiple than a capital-intensive manufacturing firm. Industry benchmarks serve as a starting point, but adjustments are made based on factors like geographic reach, intellectual property, client diversification and regulatory environment. Professionals rely on databases, proprietary comps and published transaction data to determine what multiples are reasonable for a specific sector and scenario.
How are market comparables (comps) identified and applied?
Comparable markets are selected by identifying recent transactions involving similar businesses in terms of size, industry, geography and financial performance. These comps are drawn from public deal databases, private transaction reports and industry analyses. Once a pool of relevant comps is established, valuation experts analyze the multiples paid in those deals and adjust them to reflect differences between the subject company and the comparable. The result is a refined range of multiples that, when applied to the company’s financials, produce a market-informed valuation estimate. This method helps ground the valuation in real-world buyer behavior and investor expectations.
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