With the multiplier method, there is another method for company valuation. This involves an industry-standard assessment of company key figures by means of a multiplier. Although this method is relatively simple to use, it is sometimes used even in fiscal contexts. However, this is of course limited only to certain sectors for which a known correlation between the indicators under consideration and the empirically determined company values is established and recognized. This is the case, for example, with insurance brokers. Based on this, the multiplier method leads to an estimate of the company value, which can be modified by further discounts or surcharges if necessary.

In everyday life as well as in tax law, there are a large number of occasions for a company valuation. On the one hand, this can serve to determine a reasonable sales price. On the other hand, liquidation may also require a company valuation. Then again there are situations in which there is a dispute about a company, which can be done by admitting or leaving partners or investors, but also in the case of a divorce or an inheritance in question. In the latter case, a tax consideration is also appropriate. However, the departure of a GmbH shareholder can also be a tax-related matter in which one resorts to a company valuation. And in all these cases, both general and special methods of company valuation are available. One of these methods is the multiplier method.

The multiplier method makes it possible to determine an enterprise value on the basis of a comparative value. This comparison is a measure of the company in a particular sector for which other comparable companies are also aware of the prices actually achieved on the market. If one now compares these two known variables to each other, one obtains a multiplier, with which one merely needs to multiply the company ratio in order to arrive at the enterprise value. And since one can broadly assume general validity within an industry, this justifies an applicability to all other comparable companies in this industry.

An example: If you want to evaluate the operation of an insurance broker as a company, you can choose between two key figures as a reference. On the one hand, you can set the annual turnover. For this purpose, the factor by which the turnover can be multiplied to conclude the enterprise value is 3. On the other hand, the profit (EBIT) with a multiplier of 5 can be used to determine the enterprise value.

But the multiplier method also has certain general limitations. Because the key figures must always be positive figures for this. Finally, the value of the company under assessment is compared with the values observed on the market. And these are always positive. So if a company makes a loss, it still has a positive value. In such cases, one must either use other clearly positive indicators for the valuation of a company using a multiplier method (for example, sales), or use another method. Equally important, however, is that the choice of benchmarks is neutral in terms of the meaningfulness of the company valuation. Otherwise, this could distort the valuation. However, we will discuss further restrictions in a separate section of this article.

Basically, with the above example of the company valuation of an insurance broker, we have already presented the basics of the multiplier method. However, some further adjustments are also possible here. Both cuts and surcharges are possible. In principle, these are always added to the product of multiplication.

Surcharges and discounts are usually due to subjective considerations. Here, a taxable person as an entrepreneur who wants to achieve a good result for his company for sale can come closer to his goal, in particular by way of surcharges. In contrast, a potential buyer may look for ways to cite discounts as an argument for a purchase price reduction. However, an entrepreneur could also have reason to find discounts for a gift himself in order to reduce the gift tax.

3.1.1.

With the discounts, two different possibilities are relevant. On the one hand, a so-called portfolio discount can be considered if a company to be evaluated offers only one product, but the comparison group offers greater diversity in this respect. Because in this case, the low product diversity expresses the value of the company compared to others. Finally, a company that can spread its entrepreneurial risk among several mainstays is better prepared for potential changes (for example, in the market) than one that can only bring low diversification into the calculations using the multiplier method.

3.1.2. small cap discount

On the other hand, a so-called small cap discount may appear necessary. Because if you want to determine the value of a company that has less capital available than the market leader also considered in the comparison group, then of course this also has an influence on the company value. Thus, the small cap discount as a discount is a way of including the capital strength of a company in the company valuation by means of a multiplier method.

3.2.1. Control allowance

Anyone who has a significant share in a company has a decisive influence on its management. Therefore, in the case of a sale, in particular, of a majority of the holdings, this associated position of power can mean a higher value of the company shares. This is taken into account in the multiplier method via a so-called control surcharge.

3.2.2. Additions in case of goodwill activation by a buyer

When entrepreneurs sell companies, then the sale also includes the company’s goodwill. The specific composition of the goodwill is irrelevant. In this context, it is only important that the buyer now has the opportunity to write off the acquired goodwill. In this indirect way, he receives the previously paid company value refunded via tax. Thus, a seller can include this future tax bonus of the buyer to some extent in his price calculation via a surcharge under the multiplier method.

3.2.3. Surcharges for the acceptability of shareholdings

Often headings to chapters are self-explanatory. However, in this subsection, the heading shall require an explanation of the concept of acceptability. First of all, this is a legal term for movable objects, for which there are similar equivalents according to external criteria (§ 91 BGB). The most famous example of this is money. But goods produced in mass production also meet this criterion. Unique paintings, carpets or immovable real estate are counterexamples in which there is no justifiability.

The question now is why there should be a supplement for the acceptability of the company value? After all, a company is basically always a unique product for which you set your own value. However, there are also companies whose shares can freely circulate in the existing market, such as money. Right, we're talking about stocks in particular. Because shares of listed entrepreneurs are much easier to trade than other company shares. This advantage in the marketability of a company due to the acceptability of the company shares is included in the company valuation under the multiplier method via a separate premium.

Since the multiplier method in all its forms is always a simplification, it also has many limitations regarding its significance. We have already mentioned this briefly in the second chapter. Now we provide some more details.

For example, the multiplier method is also partly dependent on general economic developments, which can vary within the reference period. In this way, a multiplier on the one hand can result in an excessively low current value or an excessively high one.

In addition, a company valuation by the multiplier method, where subjective increases or discounts may be applied, is hardly objective.

Which brings the next criticism of the multiplier method to the fore. Because the method can only be as good as it leads to objectively comparable results. It should therefore be assumed that when different multipliers are used, a comparable enterprise value always results from the calculation. However, the mere fact that the reference values on which the multipliers are based are themselves subject to different external influences makes this hardly universal. For example, commercial or tax requirements for accounting lead to different multipliers.

Nevertheless, the multiplier method has largely proven itself in the past. However, it usually comes into question as a comparative value in the assessment of the plausibility of company valuations, which are derived by means of other methods. And even for tax purposes, the multiplier method can be applied if other methods, such as the simplified income method, result in less realistic corporate values.