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The Misleading Reality of Valuation Multiples

Posted On : 11th November 2021

Valuation is a key discussion topic during an M&A deal. Very often and rightly so, enterprise value multiples are used as a benchmark within an industry. However, if valuation was only about multiples, it would be too simple! Valuation cannot be reduced to applying a multiple on financial KPIs – below are some key perceptions and reality about multiples.

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Perceptions:

  1. It’s simple; it’s not so simple, because it depends on which KPI you apply, and whether the metric is normalised, reported, historical or budget etc…
  2. It’s right; even with access to a professional database (see results in the extract from MergerMarket), it is very difficult to get accurate (and real) data points on a representative pool of private deals.
  3. It’s easy to apply; applying multiples to companies of a different type/size/growth factor is by essence, wrong. In principle, multiples should be proportionate to size and growth and in the current market climate, especially to growth.
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Realities:

  1. Practical tool; it is indeed a good way to initiate an M&A discussion and assess if both parties are within a practical range for discussions.
  2. Relative value; using multiples as a benchmark and analysing the trend of the multiple over time in a given sector may provide an indication of market sentiment.
  3. Comparability; it is important that granular information is used to ensure that the multiples are derived from transactions that are in fact comparable.

Beyond multiples, there are qualitative factors involved in a deal, especially for people and IP based businesses. The following qualitative criteria are actually more important than multiples to take into consideration during an M&A deal:

  1. Top-line revenue: Why your value proposition is attractive to your clients?
  2. Strategic fit: Why the 2 organisations (buyer and seller) are going to create a compelling offer on the market?
  3. Cultural fit: Why the staff are going to enjoy the new environment and the new journey proposed by both parties?

These three factors should be considered along with a retention mechanism that is formulated to retain the people-based aspect of the deal. Under current market conditions, we see a trend towards earn-out / deferred consideration based on staff and management retention; this is not captured in multiples!

At SCD Advisory, we offer a range of services from deal preparation to transaction execution. Contact us at info@scdadvisory.com to find out more.

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Pierre Briand preview image
Written by: Pierre Briand, Founder & Managing Partner

Pierre brings 25 years of expertise in advising entrepreneurs, with a deep background in management and financial advisory across corporate finance, private banking, and wealth management. His extensive experience includes numerous sell-side and buy-side deals, IPOs, mergers, integrations, and consulting projects for both small businesses and large global corporations. As an established and highly regarded advisor, Pierre is known for his savvy, trusted guidance.

Pierre’s career began in Australia before he moved to France, where he worked with prominent business figures like billionaire François Pinault on M&A deals within the Artemis group. He then founded BC&D, an M&A small-cap firm in Paris, where he managed corporate advisory services across Europe, covering both origination and execution. His work extended beyond transactions, advising entrepreneurs on wealth management strategies to optimise the transition from business ownership.

In Paris, he held advisory roles at the Belgium Family Office (DeGroof) and as a senior private banker and head of the HNW segment for France at JP Morgan. Returning to Australia in 2015, Pierre established the ANZ subsidiary of a UK-headquartered M&A firm, executing 9 M&A transactions across Australia. In 2019, he launched SCD Advisory, where he has since completed 35+ transactions, earning multiple global awards in M&A advisory from 2021 to 2024. Notably, he was named ‘Deal Maker of the Year’ by Finance Monthly in 2022 for his sale of Hypothesis to McKinsey & Co.

Pierre graduated from the Business of Troyes in France and has a postgraduate in Corporate Finance from the University of Caen. He is also a certified Financial Analyst and a Graduate of the Australian Institute of Company Directors (GAICD). Pierre further enhanced his credentials by completing the “Leading Professional Services Firms” program at Harvard Business School. His track record and accolades highlight his dedication to excellence and his exceptional skill in delivering successful outcomes for his clients.

Pierre is French, Australian citizen, Overseas Citizen of India. He is married and has two children. He is passionate about international travel, gastronomy, sailing and golf. As an experienced sailor, his motto in business and life in general is: “We cannot direct the wind, but we can trim the sails”

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