How to Calculate Valuation Multiples for Different Markets

Valuation multiples provide guidance for determining what the appropriate valuation for a company should be, relative to its industry, revenue or EBIDTA (Earnings Before Interest Taxes Depreciation and Amortization).

Using multiples allows you to value a business in context. Venture capitalist Fred Wilson covers this particular topic in a recent article, taking five SaaS businesses (Salesforce, NetSuite, Constant Contact, Taleo and RightNow) and crunching the numbers to determine valuation multiples for each. Based on some rough financial estimates, Wilson’s analysis tallied the following averages for the five companies (to perform this calculation yourself, divide the enterprise price by revenue or EBITDA to get your multiple):

SaaS Price/Revenue 2011: 4.8x

SaaS Price/Revenue 2012: 3.9x

SaaS Price/EBITDA 2011: 66x

SaaS Price/EBITDA 2012: 31x

In the end, this calculation allows for an accurate assessment of a company’s true value. If you’re an SaaS company, look for a 4.8x valuation based on your revenue for this year, 3,9x for next year and so on.

For more on determining valuation multiples in various sectors, read the full article by Wilson.