# Multiple

Last updated: March 29, 2024

## What Does Multiple Mean?

A multiple or "multiplier" is applied to a specific financial metric of a company to calculate the business’ valuation or assess its reasonability. The most common financial metrics that multiples are applied to include:

• EBITDA
• EBIT
• Net Earnings
• Revenue

If a multiple is applied to a pre-debt number, like EBITDA, EBIT or Revenue, the resulting valuation is the estimated enterprise value. If the multiple is applies to an after debt number, such as net earnings, the resulting valuation is the estimated equity value. A multiple is referred to as "4 times", "4x" or "4 turns", as an example, which would refer to EBITDA being multiplied times 4 to yield the estimated valuation of a company.

## Divestopedia Explains Multiple

One way to think of a multiple is as a measurement of risk. The inverse (or reciprocal) of a multiple shows the current return on an investment. So the higher the multiple, the less risk a buyer perceives in the transaction and the more they will pay for the investment. For example, the inverse of a 3x multiple is 33%. For a buyer to require a 33.3% return on an investment, the business may not be growing or is in a tougher, more capital-intensive industry. Either way, a general interpretation is that this investment is pretty risky. In comparison, the inverse of a 7x multiple is 14.3%, meaning that the buyer would be willing to pay 7x only if the investment is much less risky.

Multiples used to value private businesses are sometimes derived from the public marketplace under two scenarios:

• Valuations that are implied by public companies; and
• Valuations that are disclosed from M&A activity.

Be sure to compare "apples to apples" when applying these market multiples to determine the value of your business. For example, it would be incorrect to apply an EBITDA multiple to net earnings. Also, make sure to differentiate between equity value (calculated using a multiple applied to an after debt number) vs. enterprise value (calculated using a multiple applied to a before debt number).