At Unbroker, we know that understanding typical multiples for business valuation is essential for accurate company assessments. These financial ratios provide quick insights into a company’s worth relative to its peers.
In this post, we’ll explore the most common multiples, their applications, and limitations. We’ll also share practical tips for using these tools effectively in your valuation process.
What Are Business Valuation Multiples?
Definition and Importance
Business valuation multiples are financial ratios that compare a company’s value to a specific financial metric. These tools allow for quick assessments of a company’s worth relative to its peers. In the fast-paced world of business sales, these multiples provide essential insights for making informed decisions.
Common Valuation Multiples
The most frequently used multiples in business valuation include:
- Price-to-Earnings (P/E) Ratio: This multiple compares a company’s stock price to its earnings per share.
- Enterprise Value to EBITDA (EV/EBITDA): This ratio proves particularly useful for comparing companies with different debt levels.
- Price-to-Sales (P/S) Ratio: Analysts often use this for fast-growing companies or those not yet profitable.
- Price-to-Book (P/B) Ratio: This multiple helps in asset-intensive industries.
Practical Application of Multiples
When applying multiples, start with industry benchmarks. Then, adjust based on your company’s specific characteristics. For instance, if your company’s growth rate doubles the industry average, you might justify a multiple 20-30% higher than the norm.
Adjusting Multiples
Multiples aren’t one-size-fits-all. They require adjustments based on factors like company size, growth rate, and profitability. Sophisticated AI-driven processes (like those used by some valuation platforms) ensure the use of the most appropriate multiples for each unique business.
Beyond Multiples
While multiples are powerful tools, they represent just one part of a comprehensive valuation. Combining multiple valuation methods ensures the most accurate assessment of a business’s worth. This approach provides a more holistic view of a company’s value, taking into account various factors that a single multiple might miss.
As we move forward, we’ll explore how to apply different multiples for accurate valuation, diving deeper into each type and its specific use cases.
How to Apply Different Multiples for Accurate Valuation
Price-to-Earnings (P/E) Ratio
The P/E ratio serves as a popular multiple for investors. To calculate it, divide the company’s stock price by its earnings per share. For instance, a company with a $50 stock price and $5 earnings per share has a P/E ratio of 10.
P/E ratios fluctuate across industries. As of January 2025, the Building Materials sector had an average P/E ratio of 20.51, while the Business & Consumer Services sector averaged 48.68. The Cable TV sector had an even higher average of 55.56.
When using P/E ratios, compare within the same industry and consider growth prospects. A high P/E might indicate overvaluation or strong growth expectations. Context remains paramount.
Enterprise Value to EBITDA (EV/EBITDA)
EV/EBITDA proves useful for comparing companies with different debt levels. Calculate it by dividing the company’s enterprise value (market cap plus debt, minus cash) by its earnings before interest, taxes, depreciation, and amortization.
A lower EV/EBITDA typically indicates a more attractive investment, but industry context matters. As of January 2025, Enterprise Value Multiples varied significantly across sectors in the US.
Pay attention to capital expenditure requirements when using this multiple. A company with a low EV/EBITDA might seem attractive, but high ongoing capital expenditures could lower its true value.
Price-to-Sales (P/S) Ratio
The P/S ratio proves particularly useful for fast-growing or not-yet-profitable companies. Calculate it by dividing the company’s market capitalization by its annual revenue.
This varies significantly across sectors, with the technology sector often having higher P/S ratios due to high growth expectations.
Consider profit margins when using the P/S ratio. A company with a low P/S ratio might seem undervalued, but thin profit margins could indicate fair pricing or even overvaluation.
Price-to-Book (P/B) Ratio
Calculate the P/B ratio by dividing a company’s stock price by its book value per share. This ratio proves particularly useful in asset-intensive industries.
As of January 2025, P/B ratios varied significantly across sectors. The Aerospace/Defense sector had an average P/B ratio of 6.83, while the Air Transport sector averaged 2.94. The Apparel industry had an average of 3.14, and the Auto & Truck sector averaged 6.85.
Consider the nature of the company’s assets when using P/B ratios. For tech companies with significant intangible assets, P/B might understate the true value. Conversely, for companies with outdated physical assets, P/B might overstate the value.
These multiples provide powerful tools for valuation, but they work best in combination and with a deep understanding of the company and its industry. The next section will explore the limitations and considerations when using these multiples, helping you refine your valuation approach even further.
What Are the Pitfalls of Using Valuation Multiples?
Industry Variations Can Distort Results
Different industries exhibit vastly different typical multiples. For example, as of June 2025, the S&P 500 Information Technology Sector had an estimated P/E ratio of 35.35, while other industries may have different averages. Using a uniform approach across industries can lead to inaccurate valuations.
To avoid this pitfall, use industry-specific benchmarks. The Stern School of Business at NYU publishes updated industry averages for various multiples, which can serve as a starting point. However, don’t stop there. Investigate sub-sectors and niche markets for more precise comparisons.
Growth Stage and Company Size Influence Multiples
A startup with high growth potential but negative earnings will have very different multiples compared to a mature company with stable cash flows. Small cap companies often trade at different multiples than large cap companies in the same industry.
When valuing a business, consider its life cycle stage and size. For early-stage companies, revenue multiples might prove more appropriate than earnings multiples. For mature companies, focus on earnings and cash flow multiples. Always compare similar entities – match the company you’re valuing with peers of comparable size and growth stage.
Economic Conditions Affect Multiples
Multiples aren’t static – they fluctuate with market conditions. During economic downturns, multiples tend to compress across the board. In bull markets, multiples often expand.
Stay informed about current economic conditions and their impact on valuations. The FRED database provides an excellent resource for tracking economic indicators, with 826,000 economic time series from 117 sources. Adjust your expectations and calculations based on the current economic climate.
Overreliance on a Single Multiple Can Mislead
No single multiple can capture all aspects of a company’s value. Overreliance on one metric can lead to skewed valuations. For instance, a company might appear undervalued based on its P/E ratio but overvalued when considering its debt load (which EV/EBITDA would capture).
Use a combination of multiples to get a more comprehensive picture. Consider both earnings-based (P/E, EV/EBITDA) and asset-based (P/B) multiples. This approach will help you identify potential discrepancies and arrive at a more accurate valuation.
Company-Specific Factors Can Skew Multiples
Unique characteristics of a company can make standard multiples less applicable. These factors might include exceptional growth rates, pending litigation, or significant one-time events.
Adjust multiples to account for these company-specific factors. For instance, a company growing at twice the industry rate might justify a multiple 20-30% higher than the norm. Always consider the context and unique circumstances of the company you’re valuing.
Final Thoughts
Typical multiples for business valuation provide powerful tools to assess a company’s worth. Each multiple offers unique insights into different aspects of a business, from market sentiment to debt levels and growth potential. However, these multiples require careful application and interpretation, considering industry variations, company size, growth stage, and economic conditions.
We at Unbroker understand the complexities of business valuation. Our modern platform combines traditional valuation methods with AI-driven processes to ensure accurate, fair valuations. We offer transparent, low-cost options for business sellers, eliminating high brokerage fees while providing expert support and a vast buyer network.
Whether you seek a hands-off selling experience or prefer a more DIY approach with expert guidance, Unbroker’s services can help you navigate the valuation process. Our goal is to assist you in achieving a successful sale, leveraging our expertise in typical multiples for business valuation and comprehensive valuation strategies.
