Private Firm Valuation using Enterprise Value Multiples: An Examination of Relative Performance on Minority and Majority Share Transactions

Abstract

The market approach employing valuation multiples plays an important role in valuing private firms by complementing, calibrating, or even substituting discounted cash-flow valuations. Existing research, elaborating upon the absolute performance of multiples as well as the relative performance of various multiple’s definitions, is in its entirety limited to trading multiples generated from data on listed companies. Since the market for corporate takeovers of private firms is at least as important as that for public companies, this study expands the research to the relative performance of transaction multiples, being employed in valuing private firms.

Examining the performance of four enterprise value multiples according to bias and accuracy, the cross-sectoral as well as the sector-specific results indicate superiority of the enterprise value to total assets multiple and inferiority of the enterprise value to sales multiple. Furthermore, on a cross-sectoral basis, the enterprise value to EBITDA multiple clearly dominates the enterprise value to EBIT multiple. In a sectoral breakdown, the results get somewhat diffuse with the enterprise value to sales multiple occasionally outperforming earnings multiples, the earnings multiples showing no clear superiority among each other and, the multiples occasionally performing differently on bias and accuracy. All results hold similarly for both, minority share as well as majority share transactions.

Keywords: private firm valuation, enterprise value multiples, transaction multiples, multiple perfor-mance

JEL Classification: G32