Valuation multiple

What a multiple is

A valuation multiple is the factor applied to a financial figure to estimate what a business is worth. A profit of 200,000 euros at a factor of four gives a value of 800,000 euros. The factor itself is not calculated, it is derived from comparable transactions. That makes it the point where experience and market conditions meet.

Which figure is multiplied

• EBITDA: Earnings before interest, taxes and depreciation. The most common basis, because it ignores the capital structure.
• EBIT: Deducts depreciation. More meaningful for businesses with heavy own equipment.
• Revenue: Only sensible when the margin is stable and known. Common in retail for very small operations, frowned upon otherwise.
• Retail special case: A multiple of inventory value, especially in a clearance or stock takeover.

Why retail is valued lower

A multiple reflects risk and repeatability. Software businesses have high gross margins, little inventory and revenue that recurs. Retail businesses hold stock, manage returns, employ warehouse staff and carry a share of revenue that must permanently flow into advertising. Each of these raises risk and lowers the factor. Compared with software, retail therefore sits systematically below.

Within retail, further traits decide. A shop without retention, generating all of its orders through paid ads, receives a lower factor than one with a loyal base and direct contact. An assortment with own brands is valued higher than pure resale of branded goods, because the margin is not negotiable. And a business that cannot run without its founder attracts a discount as well.

What moves the factor in practice

Seven points decide the range more often than any industry table. Growth over the last three years, because a straight line is worth more than a spike. Margin after all costs, not revenue return before advertising. Share of returning customers and repeat purchases. Dependence on single suppliers or a single marketplace. Dependence on people, above all the founder. Quality of the numbers, because clean reporting is a value factor in itself. And the breadth of the buyer pool, because a business only one buyer wants creates no competition.

How the value emerges in a conversation

In practice a range is named first and then corrected. Corrections concern adjusted earnings, meaning profit without one-off costs and without a salary that was only formally paid. Net working capital is looked at separately too, because stock and receivables are paid for or taken over in addition. Often the argument is not about the factor but about these side calculations.

For sellers a simple priority follows: make the numbers robust first, meaning bookkeeping by cost type, inventory valuation and customer metrics. Only then talk about the factor. Most negotiations fail not on the multiple but on the question of whether the earnings are credible.