The multiples approach to valuing
There are a several ways to determine the value of a business. Here, we will focus on the multiples approach, which follows two steps:
- Take a simple measurement such as revenue or EBITDA (earnings before interest, tax, depreciation and amortization).
- Apply a multiplication factor based on industry sales or comparable companies in the sector.
While this approach may seem simple, there are many factors that need to be considered. The fundamental rationale behind multiples-based valuation is that businesses in the same industry or sector should be valued based on their comparison to other similar businesses.
- For example, a business with an EBITDA of $10 million, with comparable EBITDA multiples of between 6 and 8 times, would likely be valued between $60 million and $80 million.
For some sectors, an EBITDA multiple is not the most commonly utilised metric. For instance, Financial Services tends to trade on Price / Earnings (PE) ratios, while Transport trades on Earnings before Interest and Tax (EBIT) multiples.
The table below summarises the multiples observed across a range of sectors Nash Advisory covers, as well as our view on the mergers and acquisitions outlook over the next 3 to 5 years for each sector. It is important to note that these EBITDA multiples are based on historical transactions, typically of companies with an Enterprise Value of over AUD $200m.
Source: Mergermarket, Nash Analysis
In addition, there are a few key factors which can add or detract between 0.5x-1.5x on a multiple for a particular company, being:
- Depth of the management team
- Geographic coverage
- Strong brand recognition in the market
- Size and scale
- Nature of revenue and earnings (recurring or once-off).
For further information, or for a detailed valuation, contact the team at Nash Advisory.
The financial sector tends to trade at high multiples to EBITDA, of between 6-12x. Some outliers can be as low 3-4x or as high as 15-20x. The ranges are largely dependent on:
- The diversity and nature of earnings
- The level of assets required for the company
- The kind of markets that the company operates in
With the rapid changes and improvements in technology, the regulatory environment and the rising consumer focus, the financial sector is receiving a high level of interest from parties wishing to buy and sell in the wake of these potential changes.
As this sector is fairly diversified, the EBITDA multiples tend to reflect this variability. Sale multiples range between 4-10x. This range is largely dependent on:
- Level of exposure to major supermarket chains
- Diversity of product lines
- Consumer trends for products or product segment
- Split of domestic versus international sales
Changes in the market are giving consumers better choice in how and where they spend. Major strategic and financial buyers are on the lookout for unique businesses to acquire, thanks to the growing market dominance of large supermarket chains and premium brands.
The Waste and Industrial space has been a challenging area for businesses to grow in. However, businesses in the sector have shown both resilience and ingenuity to redefine business models to differentiate themselves and create value.
Multiples in this sector are between 3-8x. These can be dependent on:
- Level of assets in the business
- Level of vertical integration of services
- Regulatory environment
- Specialisation and barriers to entry
With both state and federal governments focusing on environmental policy changes, companies that can help are highly sought after. In addition, large diversified industrial companies are continuing to add scope and services to their overall capability, and remain acquisitive.
As Australia’s third largest export industry behind iron ore and coal, investment from government remains a key driver for growth in education. The sector is characterised by public sector, private sector, NGOs and not-for-profits, which makes for a unique blend of interests and motivations.
Multiples for this sector range depending on the type of service provided, but typically are in the range of 4-10x. This can be dependent on:
- Type of service provided
- Length and breadth of course offering
- Quality of content and courses
- Type of courses offered
- Types of students
Although many sectors are subject to the changing preferences of governments, education is particularly sensitive to regulatory changes. Given the economic tailwinds supporting long term growth in the sector, interest has come from local and international buyers, including strategic and financial buyers.
The IT and Digital sector has been a steady growth market for the last 20 years. Small to medium sized business are able to carve out profitable niche businesses in the sector without bumping heads with the major international corporations.
Multiples in this sector tend to be higher than others, ranging from 6-12x. This can be dependent on:
- Revenue or business model
- Quality of clients and spread of customers
- Scalability of business model
- Presence in multiple markets
- Pace of change of technology
Given the ability to scale and outsource to remain cost-competitive, acquisition activity has been supported by large strategic buyers. Interested parties also include those looking to vertically integrate services into their existing offerings, and financial sponsors attracted by the consistent earnings and growth.
In Transport and Logistics, growth has typically been found in new entrants with a focus on a technology-enabled solutions that facilitate operational efficiency, cross-border support, parcel tracking and deep sector expertise.
The multiples for this sector tend to trade between 4-15x. This is dependent on a number of factors:
- Volume of cargo managed
- Cartage specialisation
- Geographic partners and their effectiveness
- Access to priority trade routes
- Supply chain support
- Type of logistics operations
Large organisations need to consider how they need to remain relevant as consumer and business purchasing trends change over time. Disruption has led to increased levels of acquisitions and consolidation, supported by a lower currency and improved terms of trade for Australia.
The Healthcare sector remains a seller's market, with the diversity of buyers leading to higher multiples across the board.
Our research suggests the multiples in healthcare can be in the range of 6-12x. This varies depending on:
- National presence
- Effective use of technology
- Exclusivity on product or category distribution
- Contracts with government
- Growth prospects
Global trends affecting healthcare include ageing populations, increasing life expectancy, technology proliferation and private sector involvement. Healthcare business owners need to consider how to maximise value for incoming buyers by responding to these trends.
Australia continues to be a destination of choice for travellers. As a result, businesses in the sector have benefited from a number of growth tailwinds which have supported continued growth and success.
Multiples for tourism businesses can be in the range of 6-12x. This is largely dependent on:
- Target demographics
- Service offering
- Barriers to entry
- Contracts or licenses for operations
- Capital intensiveness
Private equity firms and global tourism operators are continuing to grow via acquisitions, offering the capability to support growth agendas. Given the level of activity and the sophistication of buyers, it is important for tourism business owners to consider how they structure their business.