Valuation is not the mechanical application of a multiple

When someone asks what a business is worth, the temptation is to find an average sector multiple and apply it to the latest EBITDA. That calculation may provide a reference, but it is not, by itself, a valuation.

Businesses with the same revenue and EBITDA can justify very different values. Growth, recurring revenue, customer concentration, investment requirements, shareholder dependence, management quality and financial risk all affect future cash generation.

A robust valuation combines methods, makes assumptions explicit and presents a value range that is consistent with the purpose of the analysis.

Start with purpose and valuation date

Method and depth depend on the decision. A valuation prepared for the sale of a business is not necessarily identical to one required for a shareholder reorganisation, capital raise, strategic plan or acquisition analysis.

The valuation date, perimeter and available information must also be defined. Subsequent changes in accounts, customer relationships, debt or markets may alter the conclusions.

Normalise financial performance

Before applying any method, historical performance should be understood and recurring earnings separated from exceptional effects. Reported EBITDA may include one-off income or costs, related-party transactions or remuneration that does not reflect market terms.

Normalisation may consider:

  • exceptional income and expenditure;
  • shareholder or director remuneration;
  • rent and services contracted with related parties;
  • grants and compensation;
  • accounting changes;
  • essential investment or expenditure that has been deferred.

Adjustments must be documented and defensible. A valuation should not treat every unfavourable expense as non-recurring or disregard costs required to maintain the business.

Valuation using multiples

The multiples approach compares the business with listed companies or relevant transactions. Common indicators include EV/EBITDA, EV/EBIT and EV/Revenue, together with sector-specific operational metrics in appropriate cases.

Comparability is the challenge. Size, geography, margins, growth, risk, liquidity and business model can justify substantial differences. Listed-company multiples reflect market liquidity, while transaction multiples may include control premiums and transaction-specific terms.

Ranges and adjustments should therefore be explained rather than presenting a sector average as a universal rule.

A simplified example

Consider a business reporting EBITDA of €1.1 million. After reviewing non-recurring items and expenses required for normal operations, normalised EBITDA is assessed at €1.2 million.

If relevant market references support, solely for illustration, a multiple of 6 times EBITDA, the indicative enterprise value would be:

  • normalised EBITDA: €1.2 million;
  • reference multiple: 6.0x;
  • indicative enterprise value: €7.2 million.

If net debt and other agreed adjustments total €1.5 million, the indicative shareholder value would be €5.7 million.

This calculation does not automatically determine price. Negotiated value may also depend on working capital, transaction perimeter, deferred consideration, an earn-out, warranties and competition among buyers.

Discounted cash flow

The discounted cash flow, or DCF, method estimates the present value of future cash flows. It requires operating forecasts, investment and working-capital requirements, tax, terminal value and a risk-adjusted discount rate.

Its main advantage is the ability to reflect the specific characteristics of the business. Its main weakness is sensitivity to assumptions. Small changes in future margins, terminal growth or discount rate can produce material differences.

A DCF should therefore include sensitivities and be compared with market references. Forecasts must be linked to commercial, operating and financial capacity rather than simply applying growth percentages in a spreadsheet.

Enterprise value and equity value

Enterprise value broadly represents the value of operations before considering how they are financed. Equity value is the amount attributable to shareholders after relevant financial adjustments.

The bridge normally begins with net debt, but may include leases, debt-like liabilities, non-operating assets, shareholder receivables or other items defined for the transaction.

This is a frequent source of disagreement. Two parties may agree on a multiple and still reach different prices because they use different definitions of cash, debt and working capital.

Businesses without positive EBITDA

Startups, transforming businesses and development-intensive companies may not have positive EBITDA. Valuation may then consider revenue, operating metrics, assets, replacement cost, future scenarios or comparable transactions, with greater caution.

The absence of profitability does not prevent a valuation, but it increases reliance on assumptions and widens uncertainty. Deliberate investment to build scale should be distinguished from a model that has not yet demonstrated economic viability.

The outcome should be an explained range

A valuation is most useful when it shows why value changes. Growth, margins, recurring revenue, concentration, people, investment and financial risk should be reflected in sensitivities rather than hidden in a single figure.

At Fenix Capital Partners, we combine financial analysis, valuation methods and transaction context to develop a supported reference for negotiation. The aim is not artificial certainty, but comparability between assumptions and alternatives.