Valuation by comparable multiples

Valuation by comparable multiples:

The multiples method is the most widely used approach in M&A transactions for obtaining an initial estimate of a company's value and for cross-checking the result of a discounted cash flow analysis. The logic is straightforward: if comparable companies have been sold or are trading at certain EBITDA or revenue multiples, the business being analysed should be worth something similar, adjusted for its own specific characteristics.

However, applying this method correctly goes well beyond multiplying EBITDA by a number. The selection of the comparable group, the normalisation of EBITDA, size adjustments and the control premium are variables that can shift the resulting value by a range of 30% or more. This article explains step by step how to do it properly.

What is valuation by multiples and how does it work?

Valuation by multiples — also known as relative valuation — involves determining the value of a company by comparing it with similar businesses already priced by the market, either because they are publicly listed or because they have been subject to a recent transaction. The premise is that the market is sufficiently efficient for the price of comparable companies to reflect available information on sector risk and growth.

Unlike DCF, which projects future cash generation capacity based on the internal assumptions of a business plan, multiples-based valuation provides an empirical market benchmark. Both methods are complementary: multiples give a snapshot of what the market is paying today; DCF provides the full picture of what the business may be worth going forward. A professional valuation uses both and cross-checks the results.

Valuation by multiples does not produce an absolute value — it produces a market reference range. A multiple without the context of a peer group, a normalised EBITDA and the qualitative profile of the business is a meaningless number.

Selecting the comparable group (peer group)

The quality of the valuation depends almost entirely on the quality of the peer group. Two companies in the same sector can have very different valuations if their growth profiles, margins or risk characteristics diverge. Selection criteria must be applied rigorously:

• Same sector and business model: sharing an industry classification is not enough; the revenue model, customer base and operating cycle must be similar.
• Comparable size: a company with EUR 5m EBITDA is not directly comparable to one with EUR 50m. Buyer profiles, multiples and liquidity differ — smaller companies typically attract size and illiquidity discounts relative to listed peers.
• Geography and regulatory environment: a Spanish financial services firm is not comparable to a US business in the same subsector.
• Growth profile and margins: two technology companies can command very different multiples if one is growing at 5% and the other at 30%.

For Spanish SMEs, the listed peer group typically consists of larger European companies, requiring a size discount — usually 15% to 30% — to be applied to the reference multiple.

Types of multiples: which to use and when

Multiples fall into two broad categories: Enterprise Value multiples, which measure the value of the business independently of its financing structure, and equity multiples, which measure value from the shareholder's perspective alone.

Enterprise Value multiples — the standard in M&A

Equity multiples

The Price-to-Earnings ratio (P/E) is the best known equity multiple but has significant limitations for private companies and SMEs: net profit is easily distorted by depreciation policy and leverage. Price-to-Book (P/BV) is useful in asset-intensive sectors such as banking and real estate. In private company M&A, EV multiples are always the primary reference.

Normalised EBITDA: the most critical variable

Applying a market multiple to reported EBITDA as it appears in the annual accounts is one of the most common errors in SME valuation. Reported EBITDA frequently includes non-recurring items, above- or below-market owner remuneration, personal expenses and one-off grants that distort the metric.

Normalised EBITDA — also referred to as transaction EBITDA — is the result of stripping out all items that do not form part of the recurring cash generation capacity of the business. It represents the EBITDA that a new owner would expect to achieve under normal operating conditions. A transparent, well-supported normalisation exercise is not financial window-dressing; it is an act of financial honesty that can materially increase the final valuation.

In Spanish SMEs, the gap between reported and normalised EBITDA typically ranges from 15% to 30%. A professional buyer will normalise EBITDA during due diligence. The seller who does so proactively in the Information Memorandum maintains greater control over the process and reduces the risk of downward renegotiation.

Sector multiple benchmarks — Spain and Europe

Market multiples vary significantly by sector, economic cycle and company size. The ranges below are indicative for mid-market companies with EBITDA between EUR 2m and EUR 20m in the Spanish and European markets. For larger businesses, market leaders or companies with advanced technology integration, multiples may be materially higher.

These ranges are applied to normalised LTM EBITDA (last twelve months) or to the two-to-three year average where the business is cyclical. For high-growth companies, they may be applied to forward EBITDA — the projected figure for the next financial year.

Transaction multiples and the control premium

Alongside listed company multiples, M&A advisers systematically analyse comparable transaction databases — recently closed acquisitions of similar businesses. These multiples are generally higher for two reasons:

• Control premium: the buyer pays a premium to acquire full control of the company, giving them decision-making authority over management, dividends and strategy. The typical control premium ranges from 20% to 40% above the minority trading multiple of listed peers.
• Synergies: strategic buyers embed expected post-integration synergies into their offer — cost reductions, access to new markets, elimination of a competitor.

A financial buyer (private equity fund) rarely pays a synergy premium and typically bids in the lower part of the range. A strategic buyer may pay materially higher multiples if the acquisition carries significant strategic value. Deal structures have also evolved: whereas paying 90% of the consideration in cash at closing was common during the low-interest-rate era, current transactions more frequently involve 65–75% upfront with 25–35% deferred as an earn-out tied to EBITDA performance over the 12–24 months following closing. This mechanism bridges the valuation gap between buyer and seller in conditions of greater uncertainty.

For a Spanish SME, the most relevant benchmark is comparable European transactions in the same subsector over the past two to three years, adjusted for size. Transaction databases such as Capital IQ and Mergermarket are accessible to professional advisers — an M&A firm has access to these sources.

Example: Valuation by comparable multiples

A Spanish industrial maintenance services company presents the following data:

• Reported EBITDA: EUR 1,850,000 |  Normalisation adjustments: +EUR 150,000 (above-market owner salary) − EUR 80,000 (extraordinary income)
• Normalised EBITDA: EUR 1,920,000 |  Sector multiple range: 4.5x – 6.5x
• Net financial debt: EUR 500,000 |  Surplus cash: EUR 300,000

The resulting valuation range is EUR 8.4m to EUR 12.3m. Positioning within that range depends on qualitative factors: customer concentration, owner dependency, contract recurrence and management team strength. An M&A adviser's role in arguing for the upper end of the range during negotiations is as important as the calculation itself.

DCF as a coherence check on the implied multiple

A professional valuation never relies on a single method. Multiples provide the market benchmark; DCF provides the intrinsic value based on the company's specific strategy. Coherence between the two gives credibility to the valuation; a material divergence requires explanation.

If a company's DCF implies a multiple of 15x EBITDA while the sector transacts at 8x, the analyst must review whether the growth assumptions or discount rate are overly optimistic — or articulate a clear differential argument that justifies the premium. This discipline prevents the seller from building a valuation disconnected from market reality, which will create problems in the advanced stages of the process.

Advantages and limitations

Advantages

• Quick and straightforward to apply: does not require complex financial models.
• Market-based: reflects the real behaviour of comparable companies and actual investor appetite.
• Enables direct comparisons: useful for benchmarking a company against sector peers.

Limitations

• Finding exact comparables is difficult: no two companies are identical.
• Sensitive to market conditions: can be distorted by valuation cycles or economic downturns.
• Does not capture intrinsic value: a sector-wide derating will compress multiples regardless of individual company fundamentals.

Conclusion on valuation by comparable multiples

Valuation by multiples is one of the most widely used methodologies due to its speed and clarity. By comparing a company with similar businesses in the market, a reasonable estimate of value can be obtained. However, accuracy depends critically on the quality of the peer group selection and the rigour of EBITDA normalisation. EV/EBITDA is the standard for established businesses; EV/Revenue is more appropriate for high-growth companies.

Correct application requires rigour in three areas: selecting the right peer group, normalising EBITDA thoroughly, and interpreting the multiple range in the context of the specific company's profile. The value of a business is not a static figure — it is the result of a compelling financial narrative backed by precise data.

At Maraz Corporate Finance, we carry out comprehensive valuations integrating multiples, DCF and comparable transaction analysis, with access to professional European market databases. If you would like to understand the value of your business, contact our team for an initial no-obligation consultation.

Javier de Rojas Roca de Togores

Partner — Maraz Corporate Finance

FAQs on valuation by comparable multiples

Which multiple is typically used to value a Spanish SME?

The most widely used multiple in the acquisition of Spanish SMEs and mid-market companies is normalised EV/EBITDA. The range varies by sector, but for industrial businesses or companies with recurring service revenues it typically falls between 4x and 7x. For technology or SaaS businesses, multiples are significantly higher.

Why is normalised EBITDA different from reported EBITDA?

Reported EBITDA includes non-recurring items, above- or below-market owner remuneration, one-off public grants and personal expenses that do not form part of the business's true recurring cash generation capacity. The gap typically ranges from 15% to 30% in Spanish SMEs and has a direct, multiplied impact on the final sale price.

What is the difference between listed company multiples and transaction multiples?

Transaction multiples are generally higher because they incorporate the control premium — the premium paid by the buyer to acquire 100% of the equity and full decision-making authority — and, in the case of strategic buyers, expected post-integration synergies. The typical differential between the two is 20% to 40%.

Is valuation by multiples sufficient to set the sale price of a company?

Generally not. Multiples provide a market reference range but should be complemented by a DCF analysis to capture intrinsic value and by an assessment of non-operating assets. The final price also depends on factors that multiples cannot capture: the buyer's specific profile, competitive tension in the sale process, the seller's timeline and the payment structure — upfront cash versus earn-out.