About Acquisition Multiples
At Kuhn Capital, we use sales and EBITDA multiples to get a rough, initial sense of target value. Multiples of sales are more appropriate for rapidly growing, younger companies since those circumstances depress EBITDA. Of course, focusing exclusively on sales ignores whether a company is profitable or will ever be.
Conversely, we favor multiples of EBITDA for more mature, slower-growing businesses since it’s reasonable to expect more of the same from them going forward. As a bonus, EBITDA also more closely resembles cash, and cash flow is the ultimate measure of value.
You can slice and dice sales and EBITDA multiples by company size, industry, geographic location, etc. But you’ll obtain more precise value estimates using multiples generated by acquisitions of companies that most closely resemble the business you’re valuing, rather than relying on those of an entire industry.
Other Valuation Techniques
In addition to multiples from comparable transactions, we also estimate value based on net present value (NPV) of cash flow, and seek to understand buyers’ acquisition rationales. Was there some “secret sauce” a strategic buyer found irresistible in a similar transaction? We use multivariate regression to isolate those unique value drivers.
When the values generated by these various approaches converge into a tight range, that increases your confidence in the result. For more details on the art and science of valuation, see my How to Value a Going Business and How to Value a Start-Up.
A Cornucopia of Multiples
Putting aside the complexities of accurate valuation described above, see below for private company multiples in the 14 industries we serve. While median multiples aren’t available, we performed some statistical acrobatics to approximate them: they more accurately quantify what a random seller could expect than averages.
It’s interesting to speculate why multiples vary by industry. We believe that after you exclude fundamental factors like size, growth rate, and margins, what often drives higher multiples in an industry is its youth (or newfound demand, as is the case with AI’s insatiable appetite for data). That’s because investors dream of ever-increasing returns when that’s all they’ve seen an emerging industry deliver.
The matrix below adds another datapoint of interest — average deal value by tech sector. Again, as with the multiples above, “average” here means something closer to “median.”
If you seek a more precise (and complimentary) valuation, contact us confidentially.
For dozens of fact-based articles on growing and preparing a mid-market tech company for sale, see our M&A Resource Hub on the Kuhn Capital website
SOURCES
KMCO, Private Company M&A Trending Multiples through Q4 2024
Capstone Partners, Middle Market M&A Valuations Index 2024
Forvis Mazars, Middle-Market Deal Activity 2024
Keiter CPA, Middle Market M&A Deal Trends Q4 2024