Manyanalystschoosetovalueassetsusingrelativevaluation
models.Inmakingthischoice,twobasicquestionshavetobe
answered:Whichmultiplewillbeusedinthevaluation?Will
this multiple be arrived at using the sector or the entire
market?
Which Multiple Should I Use?
Inthechaptersonrelativevaluation,wepresentedavarietyof
multiples.Somewerebasedonearnings,someonbookvalue,
andsomeonrevenues.Forsomemultiplesweusedcurrent
values,and for otherswe usedforward orforecast values.
Sincethevaluesyouobtainarelikely tobedifferent using
differentmultiples,decidingwhichmultipletousecanmake
abigdifferencetoyourestimateofvalue.Youcananswer
thisquestioninthreeways.Thefirstistoadoptthecynical
viewthatweshouldusethemultiplesthatreflectourbiases,
thesecondistovaluethefirmwithdifferentmultiplesandtry
touseallofthevaluesthatweobtain,andthethirdistopick
the “best” multiple and base our valuations on it.
The Cynical View
Youcan always usethe multiplethat best fits your story.
Thus,ifyouaretryingtosellacompany,youwillusethe
multiplethatgivesyouthehighestvalueforyourcompany.
While this clearly crosses the line from analysis into
manipulation,itisamorecommonpracticethanyoumight
realize.Evenifyouneverplantoemploythispractice,you
should consider how you can protect yourself from being
victimizedbyit.First,youhavetorecognizethatconceding
thechoice ofmultipleandcomparablestoananalystisthe
equivalentoflettinghimorherwritetherulesofthegame.