Comparison value

Determining the comparison value makes it possible to define the value of a company. This process consists of multiplying an operating index by a corresponding relative index (or multiplier). 

The comparison value is a simple method close to market reality which makes it possible to calculate the value of a given company. This method is simple because only an operating index (e.g. turnover or profits) and the corresponding multiplier are necessary to obtain the value of the company. It is close to the reality of the market since the multiplier reflects the actual sales figures of comparable companies. 

The multiplier, a relative indicator of the market value realized

Each multiplier represents a ratio between a market value realized and the chosen operating index of a company. It is assigned according to the chosen operating index. Turnover, EBITDA (earnings before interest, taxes, depreciation, and amortization), EBIT (earnings before interest and tax) or net profit are the operating indices usually chosen.

Example:

A company with turnover of CHF 8,000,000 with EBITDA of CHF 750,000, EBIT of CHF 700,000 and net profit of CHF 570,000 is sold for the sum of CHF 4,500,000 (= market value realized). Multipliers are calculated as follows:

Turnover multiplier
market value realized / turnover
CHF 4,500,000 / CHF 8,000,000 = 0.56
EBITDA multiplier
market value realized / EBITDA
CHF 4,500,000  / CHF 750,000 = 6
EBIT multiplier
market value realized / EBIT
CHF 4,500,000  / CHF 700,000 = 6.43
Net profit multiplier
market value realized / net profit
CHF 4,500,000 / CHF 570,000 = 7.89

Valuation processes

To calculate the value of a company, the method consists of identifying multipliers of similar companies that have already been sold. The average multiplier is then multiplied by the index chosen for the company to be valued. The result obtained corresponds to the value of the company.

Example:

We want to value a joinery business with turnover of CHF 2,500,000 and EBIT of CHF 125,000. To do this, we take the sale prices of six other joinery businesses of similar size and comparable structure.

Calculating relative indices makes it possible to deduce an average. It proves that for the other joinery businesses, a multiple of 0.32 of turnover and a multiple of 5.5 of EBIT have, on average, been paid. So for the joinery business to be valued, we get a range of value of between CHF 678,000 (EBIT multiplier) and CHF 800,000 (turnover multiplier). 

Advantages and limits of the process for determination of the comparison value

This process is based on actual transaction figures, which guarantees a direct connection with the reality of the market. Also, it is simple to do when you have a sufficient set of data on company transactions. But this is exactly where – when it comes to valuing small companies – the method has its limits. Since official data about transactions are rare for small companies, the quantity of data is quite often insufficient. The same applies for companies with turnover of more than CHF 50 million: in this area, the multipliers of each branch are regularly calculated via several companies and institutions, then published.

The process for determination of the comparison value also allows any uninitiated person to get a preliminary overall idea of the value of a company or to verify the plausibility of the calculated value of a company. For a detailed analysis and a precise determination of the value of the company and who may correctly assess all the characteristics of the company in question, calling on an expert is vital. 

Ranges of multipliers for small companies

Transaction data for small companies are therefore difficult to obtain. In addition, the valuation margins are greater, as the risks specific to companies weigh more heavily on SMEs. You will find an EBIT multiple sector overview from the German-speaking countries (CH, D, A) for companies with turnovers between 1 and 20 million CHF/Euro on con|cess.


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Last modification 05.12.2019

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