Valuing your business for an exit is usually overwhelming, given that you may have to decide on the best exit multiple and apply it to suitable financial metrics to get an accurate sale price.
The good news is that you don't have to decide the multiple and financial metrics alone.
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An exit multiple is a numerical multiplier you apply to a given business financial metric, such as EBITDA, to determine the value of the business before a sale.
The term may also refer to the financial metrics investors and venture capitalists use to determine the return on investment they receive when selling a business.
When it comes to business valuations, you may use exit multiples or the perpetuity growth method. Here's how the two compare:
Aspect
Exit Multiple
Perpetuity Growth
Definition
A factor or multiplier is applied to a financial metric to determine the value of a company or business.
A method used to calculate the total value of a company or business at a future point in time.
Formula
Exit Multiple = Company Value ÷ Financial metric
Total company value = Discounted FCFs for the forecast years + Discounted terminal value
Purpose
Usually, the return on investment when a business is sold is evaluated by comparing the exit value with the price the business was acquired at or the total cost of building it up.
To calculate the present value of a company or business by discounting the futuristic free cash flows and terminal value.
Application
Usually applied to the Discounted Cash Flow method by venture capitalists, private equity, and business sellers or buyers whose main goal is high returns on investment.
Usually used in equity, venture capital, and business valuations, especially when you want to keep the valuation intrinsic to the business or company because the method relies on the company's historical financial performance.
Industry Variability
Varies between industries depending on market conditions and company characteristics, among other factors.
Varies between industries based on market conditions and the overall economy, among other factors. However, the perpetual growth rate is usually almost always less than the current growth rate of the economy.
Note that both the exit multiple and perpetual growth methods can be used as alternatives and complements to each other. However, the latter usually gives a higher terminal and total value than the exit multiple method.
There's no one-size-fits-all when it comes to exit multiples. What may seem like a good multiple in one industry may not be suitable in another. The suitability depends on the industry, type of business exit, the business itself, market conditions, and the valuation purpose.
For example, two same-sector businesses with similar operations may have EBITDA multiples of 9x and 11x. Holding all other factors constant, investors may find the one with a lower multiple undervalued and cheaper, making them more likely to buy it because it looks like a better bargain.
Depending on the financial metric, you can use the following types of exit multiples when selling your company:
The seller's discretionary earnings multiple, or SDE multiple, usually applies when valuing smaller businesses with an annual cash flow of less than $1 million that heavily rely on the role of the owner or owner-operator.
The multiple compares the company value to the seller's discretionary earnings.
Your business appraiser often assesses the SDE multiples of recently sold businesses in your industry to determine an accurate average or range for your business.
The revenue multiple often applies to high-growth companies or businesses that are yet to reach profitability but have reliable revenue metrics.
The multiple compares the company value to revenue and usually derives from a market assessment of recently sold similar businesses.
The EBITDA multiple is common because it shows a direct relationship between a business’s value and its profits.
Also known as the enterprise multiple, it compares the company value to its EBITDA.
You can get the multiple by comparing the EBITDA sale multiples of similar businesses.
Business appraisers usually use the EBITDA multiple for mature businesses with low capital expenditure and stable profit margins.
Check out the free Exitwise business valuation calculator to estimate how many times your business is worth its annual EBITDA.
The EBIT multiple compares the company value to earnings before interest and taxes (EBIT).
The multiple also shows a business's value in relation to its profits and is calculated by comparing the EBIT sale multiples for similar businesses sold recently.
The net income multiple compares the company value to its annual net income and derives from assessing businesses that have recently sold using the same metric.
You can use the net income multiple to value your company if it has consistent earnings and low debt levels to see your short-term profitability while holding growth and the risks associated with it constant.
The free cash flow multiple is usually used for those businesses that have low capital intensity but generate cash significantly to indicate their potential to create high value.
The multiple compares the company value to its free cash flows and stems from comparing the FCF sale multiples of other recently sold businesses in the same sector.
Calculating exit multiples is easy when you have the company value or enterprise value and a relevant financial metric.
To get the exit multiple, divide the company value by the relevant metric.
Exit Multiple = Company Value ÷ Financial Metric
Let's check out the corresponding exit multiple formulas based on the above types of exit multiples:
While calculating an exit multiple is relatively straightforward, deciding the type of multiple to use can be challenging.
We at Exitwise can help you hire the finest M&A experts to guide you in deciding the best valuation methods that match your business's unique characteristics.
Schedule a call with us today to learn more about how you can build your dream M&A team for the highest possible profitability.
Here are some factors that may affect the method and potentially your choice of it:
Prevailing market conditions during your exit can be a major factor.
You may want to consider the level of competition, the interplay of demand and supply of capital, the general economic outlook, and the availability of M&A financing. These factors can cause market multiples to vary.
If you expect the market to be favorable during your exit, you may ask for a premium exit multiple derived from your detailed market comparison.
If you have a significant competitive advantage, the exit multiple method may favor you more. For example, offering a unique service or product could command a better sale price.
Your company’s or business's internal characteristics can lead to a lower or higher exit value. The growth rate, risk factors, and financial performance are some aspects to consider.
The general performance of the industry in which your business operates can determine how well or poorly exit multiples affect you. You can enjoy higher multiples if you are in an industry with high growth and profitability capabilities.
Even as exit multiples are ideal for their simplicity and ease of use, they have limitations. Below are some general limitations of using them in exit valuations:
Let's check out some common questions about exit multiples:
You can use exit multiples to value startups. The most common multiples used to value startups include revenue multiple, EBITDA multiple, EBIT multiple, and FCF multiple.
The perpetual growth method is an ideal alternative to exit multiple valuation methods.
Here’s the formula:
Total company value = Discounted FCFs for the forecast years + Discounted terminal value
Where;
Other methods may suffice:
Even though exit multiples are typically same-industry market comparables, there aren't industry-specific benchmarks for validating the multiples.
You can check out trusted sources like NYU Stern and First Page Sage for reliable industry-specific exit multiples data.
Using an exit multiple can be a great way to determine your business's value because the method is simple. However, it can be challenging to determine the best multiple and financial metric combinations.
We can help you hire experienced and qualified business appraisers to advise you on the best methods for a more accurate valuation and sale price. Reach out to our Exitwise team today to start building your dream M&A team!
Let Exitwise introduce, hire and manage the best, industry specialized, investment bankers, M&A attorneys, tax accountants and other M&A advisors to help you maximize the sale of your business.
