Earnings Multiple Valuation

EARNINGS MULTIPLE VALUATION article image by Rushmore Group
An earnings multiple valuation can be a suitable valuation methodology when the business is consistently profitable

Earnings Multiple Valuations are suitable for a range of entities that are consistently profitable.

In most business valuations that we undertake we use an EBIT multiple on which to capitalise the future maintainable earnings. In some cases we will use an EBITDA multiple to capitalise maintainable EBITDA.

An earnings multiple valuation is generally not  appropriate where:

  • The business or entity has made losses.
  • The business is of a type where it may be appropriate to value the business using a different technique (e.g. a financial planning practice on a multiple(s) of recurring revenue or a restaurant on a capitalisation of weekly turnover).

However its important to note that every business valuation engagement is different and there may be an exception to the above guidelines.

An earnings multiple valuation is considered a proxy for a discounted cash flow / net present value valuation. A net present value valuation is considered the most academically sound valuation (albeit there are a number of challenges to using the technique particularly with small to medium enterprises).

If you would like further information about the use of an earnings multiple valuation or a business valuation in general, then we would be delighted to speak with you further.

Rushmore are specialist small to medium market business valuers. We offer a fixed price service of $5,990 per valuation including GST and our reports are suitable to be used for taxation, court, buying a business, selling a business and other purposes.  Please call us on 1800 454 622 for more information.