What is a multiple (EV/Revenue, EV/EBITDA) and how do I choose the right one?

Full Explanation

Multiples are used when DCF is unreliable (pre-profitable, uncertain growth). EV/Revenue (or price-to-sales) is most common for high-growth SaaS because EBITDA can be negative and volatile. A SaaS company with £10M revenue at 50% growth trading at 8x revenue = £80M enterprise value. EV/EBITDA works for profitable, mature companies (limited growth, stable margins). A software company with £100M revenue, 30% EBITDA margin (£30M), trading at 10x EBITDA = £300M enterprise value. EV/Users (or price-per-user) is used for early-stage consumer apps where monetisation is uncertain. A messaging app with 10M users valued at £100/user = £1B valuation. Choosing the right multiple: 1) if not profitable, use EV/Revenue, 2) if profitable with stable margins, use EV/EBITDA, 3) if pre-monetisation, use EV/Users or similar activity metrics. Multiples vary by: growth rate (high-growth commands premium multiples), profitability (profitable companies command higher EV/EBITDA), market conditions (bull markets expand multiples), and sector (SaaS multiples > traditional software). Limitations: multiples are backward-looking (based on comparables' current performance); they can miss company-specific advantages (network effects, intangible assets) that justify premium valuations. The company valuation views in Opagio Intangibles set a DCF beside trading comparables and precedent transactions (with comparables you enter), showing how different methodologies yield different results.

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