Valuation using multiples is a popular and frequently used valuation method. We address if valuation using multiples is based on sound corporate finance principles in this article. While valuation using multiples is a popular and frequently used valuation method, it is also misused and incorrectly applied frequently! We address the misuse or incorrect application of valuation using multiples in another article and only address the technique’s underlying corporate finance principles here.
Yes, valuation using the multiples approach is a valid method to use in valuing businesses. The multiples approach is not directly built on underlying corporate finance principles; instead, valuation using the multiples approach theoretically relies indirectly on underlying corporate finance principles.
We say that valuation using the multiples approach indirectly relies on underlying corporate finance principles because the multiples approach is based on the valuations of similar or comparable companies. The valuation using the multiples approach assumes that the valuations of similar or comparable companies is sound and based on good corporate finance principles such as the DCF methods, APV and DDM. Since the valuation is derived from the valuations of similar or comparable companies and those valuations are based on sound corporate finance principles, we say that the multiples method relies indirectly on underlying corporate finance principles.