Trading and Transaction Multiples
What is this?
Multiples are financial metrics used to value a company by comparing it to similar businesses. They are ratios that relate a company’s market value or financial performance to a key financial figure, such as sales, earnings or assets. The two main types of multiples are trading multiples and transaction multiples.
When would you need it?
Here are three scenarios where your company would need to use trading and transaction multiples:
1
Trading
Multiples:
Your company is preparing for an initial public offering (IPO) and needs to set a fair price for its shares. By using trading multiples like the P/E ratio or EV/EBITDA, you can compare your company’s financial metrics with those of similar publicly traded companies. This comparison helps you determine a competitive and attractive share price for potential investors.
2
Transaction
Multiples:
Your company is considering acquiring a competitor and wants to assess a reasonable purchase price. By analyzing recent M&A transactions in your industry and using transaction multiples like EV/Sales and EV/EBITDA, you can estimate the value of the target company based on what other buyers have recently paid for similar businesses. This ensures you make a competitive offer that reflects current market conditions.
3
Combination
of Both:
Your company is conducting a strategic review to evaluate potential divestitures or spin-offs. By applying both trading and transaction multiples, you can value different business units or subsidiaries. For instance, using EV/EBITDA multiples from both public companies (trading multiples) and recent transactions (transaction multiples) provides a comprehensive valuation range, helping you make informed decisions about which parts of the business to sell or retain.