Comparable company multiple analysis

Valuing private companies: Comparable company multiple analysis

As a private company evolves and matures, both the ‘comparable company multiple method’ and the ‘comparable transaction method’ can be used to value the company over its lifetime.

In this article, we discuss the commonly used valuation multiples employed in assessing a private company's value, using both comparable companies and comparable transactions methodology. We define and provide examples of these common valuation multiples, often used to assess the market value of private companies.

Common valuation multiples approaches

Revenue multiples (EV/Revenue): This method derives value using the enterprise value to revenue multiple based on trading multiples of publicly listed companies.
Enterprise Value/Earnings Before Interest, Taxes, Depreciation & Amortisation multiples (EV/EBITDA): This method derives value using the enterprise value to earnings before interest, taxes, depreciation and amortisation multiple based on trading multiples of publicly listed companies. EBITDA is useful for comparing companies by focusing on operational performance, but in capital-intensive industries, Earnings Before Interest and Taxes (EBIT) is often considered, as it includes depreciation and amortisation, reflecting asset costs. Alternatively, Net Profit After Tax (NPAT) multiples may be used when focusing on the company’s bottom line, capturing the full effect of taxes and interest, and offering a clearer view of net profitability.
Precedent transaction multiples: This method derives value using pricing metrics of merger and acquisition (M&A) transactions involving controlling interests of companies (public and private) in the same or similar lines of business as the private company being valued.
Other industry-specific multiples: In certain sectors, such as mining, technology, or telecommunications, alternative valuation multiples like EV/Reserves, EV/Users, or EV/Subscriptions can be used. These metrics are tailored to industries where non-financial indicators, such as resource quantities or user base, are key drivers of value. They provide a more accurate reflection of a company’s future revenue potential and operational performance when traditional financial multiples like revenue or EBITDA may not fully capture the company’s underlying assets or growth prospects.

Valuation multiples based on comparable listed companies and transactions appear straightforward to apply but, in practice, are often misapplied leading to less reliable assessments of value. Our experts explore:

The benefits and pitfalls of the comparable listed companies and comparable transactions approaches
Selecting the appropriate unit of comparison
Selecting the peer group data sets used to derive multiples
Other consideration for valuing private companies relative to listed ones.

The benefits and pitfalls of comparable multiples

Although there are many considerations in the multiple selection process, some or all factors may result in a net neutral effect, where the private company being valued has no significant advantage or disadvantage in the market. The valuer should consider the following factors before deciding whether using listed company (market) multiples or transaction multiples is appropriate.

Benefits

Simplicity: Market multiples and transaction multiples both provide relatively straightforward methods to estimate market value. Compared to discounted cash flow (DCF) analysis, these approaches involve fewer subjective inputs, such as projecting future cash flows.
Broad range of metrics: Both market and transaction multiples can be applied to a variety of metrics, including revenue and EBITDA. In some cases, non-financial metrics, such as the number of users or subscribers, can also be used. This flexibility is valuable when valuing private companies that may not yet have strong revenue or EBITDA figures.
Transaction data insight: Transaction multiples provide insight into the prices paid in real-world deals. This offers a more practical perspective, especially when the transactions are recent and reflect current market conditions.
Industry-specific metrics: Both methods can apply common industry-specific operating metrics, which offer a clearer picture of the company's prospects based on sector standards. Precedent transactions often reveal industry trends, buyer preferences, and premium valuations in niche sectors.
Cross-industry application: Market multiples offer a standardised approach that can be used across different industries, while transaction multiples offer specific insights into industry deals, reflecting strategic or synergy-driven premiums paid in real-world transactions.

Pitfalls

Lack of suitable comparables: For both market and transaction multiples, finding truly comparable companies or transactions can be challenging. In particular, transaction multiples may include deals where premiums were paid for strategic reasons, distorting the data.
Market volatility: Temporary market conditions, such as extreme volatility, can lead to the selection of an unrealistic comparable multiple. Transaction multiples may also be influenced by temporary market trends or short-term sentiment, potentially skewing valuations.
Outlier transactions: In the case of precedent transactions, outliers - such as deals where the buyer paid a large premium due to strategic or synergistic reasons - can distort observed transaction multiples. The valuer needs to exercise professional judgment in adjusting for these.
Transparency and data limitations: While market multiples benefit from the availability of publicly traded data, transaction multiples often suffer from a lack of transparency. Many private company transaction details, including earnings and revenue, are not publicly available, making it difficult to rely on them without adjustments.
Differences in company size and structure: Valuers must account for differences between the target company and the companies involved in the comparable data set. This includes size, diversity, growth expectations, and other risk factors. The misapplication of multiples without adjusting for these factors can result in less reliable value estimates.

Selecting the appropriate unit of comparison

Example one: Enterprise value/revenue method

This example illustrates the considerations taken when analysing emerging and loss-making companies in the application software industry, which is characterised by negative earnings, and difficulties in building a strong customer base.

The private company being valued specialises in application software. Since its inception, the company has experienced negative earnings due to the challenges of emerging in the market, a common theme within the industry.

Companies in emerging industries, such as the application software industry, are typically valued using revenue multiples. This is because companies in the early stages of commercialising technology and products tend to be loss-making entities, eliminating the possibility of applying earnings multiples.

Revenue multiples are generally available for these companies, whereas if earnings multiples were used as the basis for valuation, the loss-making companies would be excluded from the analysis, resulting in an inaccurate representation of the market.

Enterprise value/revenue multiples
Company name	Historical revenue multiple
Cluey Limited	0.4x
Felix Group Holdings Limited	8.2x
LiveHire Limited	0.8x
OpenLearning Limited	3.9x
Schrole Group Limited	1.0x
Site Group International Limited	1.1x
Thrive Tribe Technologies Limited	12.2x
Urbanise.com Limited	2.1x
Average	3.7x
Median	1.6x

Example two: Enterprise value/EBITDA method

Example two illustrates the multiple most commonly used to value an established and profitable private company. In this case, the private company is in the construction industry, and the comparable company set includes residential and civil engineering companies.

For this example, EBITDA was chosen as the primary multiple because it provides a clear reflection of the company’s core operational performance, excluding the impact of capital structure, tax regimes, and non-cash expenses such as depreciation and amortisation. In selecting the comparable EBITDA multiples for valuing the private company, the comparability of the operating metrics of the comparable companies and the private company must be considered. Based on an initial screening, the comparable trading company multiples data set in this example is wide, so the business descriptions should be carefully scrutinised to ensure comparability.

EV/ EBITDA multiples
Comparable listed company	Historical multiple	Forecast multiple
ALS Limited	13.29	10.95
AVJennings Limited	11.44	n/a
Boral Limited	12.83	9.34
Cedar Woods Properties Limited	12.01	10.80
CSR Limited	7.92	5.94
DRA Global Limited	2.80	n/a
EVZ Limited	2.73	n/a
GR Engineering Services Limited	5.07	n/a
GWA Group Limited	6.46	6.78
Johns Lyng Group Limited	15.64	13.73
Lendlease Group	50.03	9.26
Lycopodium Limited	5.25	n/a
Mirvac Group	18.31	15.78
Monadelphous Group Limited	12.44	9.51
NRW Holdings Limited	4.82	4.27
Peet Limited	11.35	n/a
SRG Global Limited	5.92	4.76
Stockland	17.33	14.31
Sunland Group Limited	0.74	n/a
Tamawood Limited	26.00	n/a
Average	12.12	9.62
Median	11.39	9.43

Selection of comparable companies (peer group)

Small start-ups with exponential growth often select companies such as Apple and Microsoft as the foundation of the peer group used to determine their market value on the basis that they are in the same industry group and would ideally be considered ‘comparable’. Such an approach is prone to producing unreliable results for the following reasons.

The growth rates of the private company being valued compared to the peer group are misaligned, resulting in a distortion of the assessed market value. For example, if the private company being valued has revenues growing annually at 50 per cent, yet the multiple is based on a peer group containing constituent companies that are growing revenues annually at 10 per cent, this may not produce a reasonable market value.
Companies that appear to be comparable may genuinely be true competitors operating in the same industry as the private company being valued, but these companies may be so diverse and large that the revenue of the private company being valued may represent only a very small percentage of the comparable company’s overall revenues, reducing the reliability of the comparable company multiple analysis.
Even if appropriate comparable companies are identified, the shares may be thinly traded or the share price may fluctuate without fundamental reasons, either of which could result in a reduction in the reliability of the analysis.

For this purpose, we suggest selecting companies that share similar growth and operating metrics, even if they’re not in the same direct industry grouping.

It may seem counterintuitive for a comparable company analysis to appraise a (high growth) private company against a newly listed company with a compelling growth story in a different industry grouping. However, the market is likely to view such companies similarly rather than comparing them to a more established listed company with much lower growth, albeit in a more aligned industry grouping. Multiples reflect the risks of the underlying earnings and revenue, so companies at similar stages are likely to be more relevant to derive a multiple than a company with similar services or products at a different point in its life cycle.

So, it may make sense to scour the markets for companies with similar characteristics for peer group selection, specifically growth, operating metrics, and capital structure within a broader industry group.

When conducting comparable company analysis, it’s also necessary to decide whether to use historical or forecast multiples (which the tables in both example two and three include). Historical multiples provide insights based on past performance, which can be useful for stable, mature companies with predictable earnings. However, for high-growth companies or those in the early stages of development, forecast multiples are often more relevant as they reflect future growth potential. By using forecast multiples, the valuer can better align the multiple with the private company’s projected performance, ensuring a more accurate reflection of value based on expected rather than past results.

While forecast multiples may appear to incorporate future growth and profitability, they come with significant caveats. Forecasts are inherently uncertain, particularly for less established companies or those operating in volatile industries. As such, forecast multiples are generally less reliable and carry a higher risk of error due to the difficulty in predicting future market conditions and financial performance. Valuers should apply professional scepticism when relying on forecast data and, where possible, supplement these with a comparison to historical multiples to cross-check reasonableness.

Below, we illustrate the disparity in value that can result from using an inappropriate peer group as opposed to leveraging a peer group with comparable characteristics to the private company being valued.

Example three: Impact of comparable company group selections

This example illustrates the impact of using a tight comparable company group compared to a broader comparable company group. This selection may have a significant impact depending on the observed trading multiples.

The private company being valued in this example is a mining services company with a specific offering. As such, it is less diversified in terms of its product offerings and significantly smaller than its directly comparable listed company competitors.

In this instance, the Enterprise value/EBITDA multiple is appropriate, because the private company being valued has shown profits over the past three years.

Two options are presented to illustrate the impact of a narrower or wider comparable company set: a broad industry set based on producing miners and a narrower competitor set consisting of directly comparable companies with mining services as a key operating activity. The results are shown below.

Comparable companies - Narrower industry set
Mining services	EV/EBITDA historical	EV/EBITDA forecast
Boom Logistics Limited	2.92	n/a
Emeco Holdings Limited	2.48	2.31
EVZ Limited	2.75	n/a
GR Engineering Services Limited	7.39	n/a
Imdex Limited	11.61	8.01
Macmahon Holdings Limited	2.25	2.06
MLG Oz Limited	3.19	2.64
SRG Global Limited	5.47	4.51
Average	4.76	3.91
Median	3.06	2.64

Comparable companies - broader industry set
Mining services	EV/EBITDA historical	EV/EBITDA forecast
29Metals Limited	4.86	3.08
AIC Mines Limited	5.42	16.77
Mineral Resources Limited	4.84	5.35
Pilbara Minerals Limited	4.35	2.43
Resolute Mining Limited	4.30	4.22
West African Resources Limited	12.53	12.08
Average	6.29	8.17
Median	4.84	5.35

The above tables are for illustration only but show quite different conclusions, with the multiples being much higher for the broader industry set. It’s important the entities in the comparable company set include companies with a similar risk profile to the private company being valued. The risk profile is impacted by the company’s industry, the extent of diversity in its product offering, its stage of development and many other factors.

It’s also important that the comparable company set isn’t viewed as a static metric. Comparable companies grow and contract, and the set should be reviewed at every valuation date and refreshed to reflect changes if necessary.

Example four: Selection of precedent transactions

This example demonstrates the factors considered when analysing precedent transactions for the valuation of a private company in the mining services industry. Precedent transactions provide valuable insight into market-driven valuations, as they represent real-world negotiations between market participants.

The selection of precedent transactions should focus on the comparability of the target companies, considering factors such as size, geographic location, service offerings, and market conditions at the time of the transaction. Recent transactions are preferred, as they reflect current market conditions. However, in industries where transaction activity is sparse, older transactions may be included, though adjustments should be made to account for changes in market dynamics.

Valuers must also determine whether to include or adjust for 'outlier' transactions, especially if publicly available information is limited or if the transaction involved special circumstances. Additionally, it’s important to gross up transaction values to reflect 100 per cent of the target company’s interests to ensure consistency across the data set.

Transaction multiples
Closing Date	Target Company	Acquirer	Transaction value $m	Implied EBITDA multiple
18 Mar 2024	The Pybar Group	Thiess Group Holdings Proprietary Limited	175.00	4.70
23 February 2024	Gateay Group Australia	Laserbond Limited	10.08	4.50
1 November 2023	DDH1 Limited	Perenti Limited	374.11	3.32
12 October 2021	Swick Mining Services Limited	DDH1 Limited	98.99	4.55
19 July 2021	Valmec Limited	Altrad Australia Proprietary Limited	61.65	3.10
29 January 2020	Pit N Portal Group Proprietary Limited	Emeco Holdings Limited	72.00	3.60
28 January 2020	Alltype Engineering Proprietary Limited	WestStar Industrial Limited	10.33	5.16
16 August 2019	Wilson Mining Services Proprietary Limited	Mastermyne Group Limited	7.60	13.57
31 October 17	Force Equipment Limited	Emeco Holdings Limited	69.80	2.87
Mean	5.04
Median	4.50

Adjusting market multiples for private company valuations

While market multiple analysis provides a transparent and consistent framework, it’s essential to remember that private companies operate under different conditions than their publicly listed counterparts. Despite potential growth or market presence, private companies lack the same liquidity and ease of capital raising as public companies, limiting investors’ ability to quickly sell or trade shares.

To account for these differences, adjustments must be made to the multiples derived from comparable public companies. The most common adjustment is the discount for lack of marketability (DLOM), which reflects the reduced liquidity and difficulty in exiting an investment in a private company. Depending on the specifics of the valuation, other adjustments - such as for control premiums or minority interests - may also be necessary. These discounts ensure the valuation accurately reflects the private company’s unique constraints compared to public entities, making the final multiple more representative of the private company's true market value.

BDO recommendations

Valuing private companies using market multiples is a robust method, but it requires careful consideration of factors that distinguish private companies from public ones. Selecting the right comparables, an appropriate unit of comparison, choosing between historical and forecast multiples, and applying necessary adjustments such as the DLOM are critical steps in arriving at an accurate valuation. By thoughtfully applying these elements, valuers can ensure their analysis reflects both the market position of the company and the limitations inherent in private ownership, delivering a more reliable and realistic valuation result.

BDO’s valuation services team provides a range of valuation services for business owners, investors, private equity investors, venture capital investors and fund managers. Contact us to discuss your needs.

This article has been updated by our valuation experts, for the Australian market. Learn more in the context of the United States market in the article on Demystifying Valuation Methodologies: Part 2 – Comparable Company Multiple Analysis by BDO USA’s asset management team.