Another simple approach is to use a multiplier to calculate a company's value. These multipliers will vary for different industries. One way of deciding what figure to pick for a multiplier is to analyse previous company takeovers within that sector, examining what was paid for these businesses compared to their sales or profit levels.
Caution must be taken in ensuring that the level of sales or profits in the accounting period being analysed is sustainable and does not contain one-off or abnormal conditions.
Sales multiplier
The sales multiplier uses a multiple of sales to assign a value to that company.
- This could be less than or greater than 1, depending on expectations for future growth.
- Sales multipliers are particularly popular in start-up companies that are not yet profitable (eg. dot.com companies).
Profit multiplier
In the case of the profit multiplier, the multiplier used tends to be greater than 1 and will be based on
- how many years' future profit are to be factored into the value of a business as well as
- expectations for future profit growth.
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