Business Valuation Review

Volume 34 Number 4
2015, American Society of Appraisers

Valuation Using Industry Multiples: How to Choose

the Most Relevant Multiples
Edouard Chastenet, SFAF, and Alain Marion, SFAF

Our research focuses specifically on the methodology to be applied to improve the

relevance of the multiples-based valuation method regarding the identification of the
most relevant multiples (i.e., that reduce the relative absolute valuation error within any
industry-based peer group). In line with prior empirical studies, our results confirm that
Enterprise Value multiples based on EBIT and EBITDA perform better, compared to
Sales and Capital Employed, and that multiples based on forward-looking EBIT and
EBITDA are more relevant compared to corresponding actual earnings. In the absence
of forward-looking earnings, available at the date of valuation, our study shows that
EBITDA multiples provide better estimates than EBIT multiples do. Beyond these
general results, the approach implemented in our research can be easily reproduced
by practitioners (e.g., financial analysts, M&A advisors, independent appraisers) to
identify case-by-case the multiples that are the most relevant within any industry
based peer group.

The multiples method, also referred to as the guideline Theory and Practice
public company or transaction method, is becoming more It is customary to consider only three approaches in
widely used to value any company in most valuation valuing a business: (1) income based, (2) market based,
contexts (such as financial analysis, mergers and acquisitions) and (3) asset or cost based. These approaches are available
tions, or fairness opinions provided by independent in practice in a set of three of the most common valuation
appraisers). This 'popularity' can be explained by its methods: (1) the discounted cash-flows method (DCF), (2)
relative 'simplicity' compared to the discounted cash- the multiples method, and (3) the net revaluated asset
flows method and by its "objectivity" because it is based method (suitable for real estate companies or industrial
on the value of comparable companies that can be companies externalizing low profitability
directly observed on the market. However, researchers Most surveys show that the DCF method and the
and practitioners agree that it is little studied, often multiples method derived from comparable listed companies
misunderstood, and sometimes misapplied (Crow, Gibbs, Companies are predominantly used by practitioners (Chastenet
and Harms 2001). and Jeannin 2007; Harbula 2009). Confirmed by current
This article presents the results of a study that practice and increasingly addressed in valuation text
compares the relevance of different enterprise valuations books (Hitchner 2006; Koller, Goedhart, and Wessels
Value multiples (EV multiples), also referred to as Market 2007), the multiples method is also considered by many
Value of Invested Capital multiples (MVIC multiples). valuation and accounting standards (FASB 2001; ISVC
Beyond the results of general application, we show how 2001). Its ease of use and its direct reference to market
the recommended approach is able to improve the valuation of comparable listed companies tends to
efficiency of the evaluation process and therefore the obscure the fact that the multiples method is based on
relevance of the values obtained by the multiples method. solid theoretical foundations.

Theoretical background

Edouard Chastenet is an associate professor at the The DCF method and the multiples method rely on
Business Administration Institute (IAE) of University common theoretical foundations, in that they can be
of Lyon, France. Alain Marion is a professor at the directly related to the theoretical model of discounted
Business Administration Institute (IAE) of University cash flows, whose authorship can be attributed to
from Lyon, France. Williams (1938) and Modigliani and Miller (1958,

Business Valuation Review — Winter 2015 Page 173

Business Valuation Review

1961). The discounted dividend method (DDM) was Vest~Mest|CF,

initially derived by the former from the theory of interest
sets by Fisher (1907) and applied to the valuation of where Mis51/(k2g).
equity shares. The DCF method owes much to the latter Any estimated value derived from the application of
authors, the founders of modern finance, Nobel Laureates that estimated valuation multiple necessarily yields
in Economics in 1990 and 1985 respectively, in that it a valuation error corresponding to the difference between
leads the evaluator to distinguish the stream of cash flows the company’s estimated value (Vest) and its observed
generated by the assets of the company and the stream of market value (Vobs):
cash flows generated by its shares.
To apply the DCF method one should determine the Vobs~Meast|CFzError
future free cash flows that may be generated by these
assets (regardless of its financing structure). The where Error5Vobs– Vis .
evaluators then use the weighted average cost of capital
and the capitalization formula of Gordon and Shapiro Multiple-based valuation in practice
(1956) to discount these cash flows to perpetuity. The The multiples valuation method consists in applying
value obtained by applying this method is the so-called multiples derived from the observed value of a sample of
debt-free/cash-free value of the company, also called the comparable companies (also referred to as a 'peer group'),
Enterprise Value. in the form of synthetic multiples corresponding to the
The multiples method is notably based on the principle arithmetic mean or median, to the free cash flow of the
of market efficiency developed by Fama (1970), which company to be valued.
states that stock prices reflect more or less all the In practice, to calculate valuation multiples, the
information available to investors: All things being equal, appraiser will use financial aggregates (published or
The multiples method assumes that the market is efficient. estimated) that are the most representative proxy of both
enough to value similar assets at similar price (Esty the company’s and its peers’ ability to generate free cash
2000). In other words, when the multiples method is flows over a long period: EBIT (earnings before interest
applied for valuing the shares of a privately held company and tax) and/or EBITDA (earnings before interest, tax,
depreciation, and amortization) should prevail and to
whose shares are not listed, the method is assumed to
a lesser extent Sales (or Revenues) and Capital Employed
provide the value that the business would have if it was
(or Invested Capital).
itself listed.
Under these conditions, the value of any business can
According to the theoretical model of discounted free
be expressed when it is observed on the market for
cash flows, the multiples method assumes that it is a listed company or estimated in the form of a multiple
possible to identify publicly traded companies, said to be applied to these financial aggregates (FA), considering
comparable, in that they have a profile of free cash flows, the following generic formula:
growth prospects, and a level of risk similar to those of
the company that is being valued. Considering the single- FA
Veast~Mes t FA and
period model derived from the Gordon and Shapiro
(1956) formula,1a simplification of the discounted free
cash-flows method, any synthetic valuation estimated Vobservations~MeFAt FAzError
multipleeast) derived from a sample of comparable
companies can be assimilated to a capitalization factor where FA5l3CF (that is, said to be proportional to CF).
applied to the expected free cash flow (CF) of the The apparent simplicity and explicability of the
company to be valued (considering its discount and The multiples method is certainly the source of its success.
growth rates, hereafter referred to as k and g): It is thus possible to evaluate any privately held company
by applying synthetic valuation multiples representative
of the valuation level of a sample of comparable listed
1The “Gordon and Shapiro” formula provides the present value of companies. Those multiples can also be used to measure
a perpetual stream of future expected cash flows, considering a discount
rate of k and a constant cash-flow growth rate of g. This formula is a one- a trading premium/discount of any listed company
period–based simplification of the DCF model where the free cash flows of relative to its industry peers.
the company being valued are expected to grow at a constant growth rate in
perpetuity. In that model the discount rate corresponds to the weighted To identify these comparable listed companies it is
average cost of capital. customary to (1) consider companies within the same

Page 174 2015, American Society of Appraisers

 Valuation Using Industry Multiples

industry as the company to be evaluated, also referred as forward earnings, (2) historical earnings, (3) cash flows
"industry peers"; then, within these industry peers, to (2) and book value, and (4) sales.
select those that are the most comparable in terms of Lie and Lie (2002) arrived at the following conclusions
profitability and growth prospects. To calculate those regarding the relative performance of multiples: (1) the
synthetic valuation multiples, it is customary to (1) total enterprise value/book value multiple generally yields
consider financial aggregates directly issued from the better value estimates than sales and earnings multiples
financial statements of both the company and its peers, (total enterprise value/EBIT and total enterprise value/
such as Sales, EBITDA, EBIT, and/or Capital Employed EBITDA), especially for financial but also for non-
and (2) calculate the median or average of the multiples of financial firms; (2) the use of forecasted earnings instead
the referred the 'industry peer group.' of trailing earnings improves the estimates of the P/E
That being said, appraisers are often using their multiples; and (3) the EBITDA multiple generally yields
professional judgment, more or less formalized, in better estimates than the EBIT multiple, except for
regard to both the selection of comparable listed pharmaceutical companies.
companies and the choice of valuation multiples. Liu, Nissim, and Thomas (2007) discovered for their
The apparent simplicity of that method and the place sample a higher accuracy of earnings than those of
according to judgment lead some academics and profes- operating cash flows and dividends. After the shift from
professionals to believe that this method can be misapplied, reported numbers to forecasted ones, they obtained higher
resulting in a risk of unexpected valuation error and/or valuation performances for all multiples. They revealed
voluntary manipulation of the result of the evaluation. that earnings still had the best performance in this case
Three questions are being raised by the community of because their accuracy increased more than those of the
appraisers other two measures.
These studies are generally based on U.S. and/or
NWhat are the financial aggregates that should be
international data.
used to calculate valuation multiples (Capital
Herrmann and Richter (2003) examined different
Employed, Sales, EBITDA or EBIT, actual, trailing,
multiples (P/E, EV/EBIT, EV/EBITDA, P/B [price to
or forward-looking)?
book], EV/Invested Capital, and EV/Sales) for European
NWhat are the key performance indicators that should nonfinancial firms. They asserted, consistent with the
be used to select the most comparable listed
results of Liu, Nissim, and Thomas (2007), that (1)
companies within a peer group based on industry-
multiples based on earnings lead to the highest prediction
based primary selection?
accuracy and (2) sales multiples yield the lowest pre-
NShould multiples be combined and with what diction accuracy. However, they discovered that the
weighting?
P/B multiple performed better than the EV/EBITDA
We propose here some answers to the first question, in multiple when comparable firms were selected based on
the form of general results and a methodology that could ROEs and earnings growths instead of only the industry
be applied in each case by appraisers and that would membership.
prevail on professional judgment to choose the most Another study that used European data and investigated
relevant valuation multiples. the relative performance of different multiples is that
of Schreiner (2007). He found that (1) equity value
Related Literature multiples outperform entity value multiples, (2) knowl-
The relative performance of multiples has been edge-related multiples outperform traditional multiples in
regularly addressed in empirical research on the multiples science-based industries, and (3) forward-looking multi-
method. Kim and Ritter (1999) examined the use of ples outperform trailing multiples. The trailing multiples
several multiples for valuing IPOs and found that the use from Schreiner (2007) are in the following decreasing
of the price to earnings (P/E) multiple based on forecasted order from the viewpoint of accuracy: earnings multiples
earnings leads to a superior accuracy relative to those of (P/E, P/Earnings before tax, P/EBIT, and P/EBITDA)
multiples based on book value, trailing earnings, cash cash-flows multiples (P/Operating cash-flow and P/
flows, and sales. Baker and Ruback (1999) compared the Dividends), book value multiples (P/IC, P/B, P/Total
performance of multiples based on EBITDA, EBIT, and assets), and gross income and sales multiples.
sales. Their results show that industry-adjusted EBITDA
performs better than EBIT and sales. Liu, Nissim, and Data and Research Methodology
Thomas (2002) studied the performance of a list of value Since the market price of comparable listed companies
drivers and found the general ranking for multiples: (1) can be considered one of the repositories that may be

Business Valuation Review — Winter 2015 Page 175

Business Valuation Review

useful to investors in valuing a business (among others, absolute valuation error (RAVE) as the absolute ratio
intrinsic value derived from the DCF or the net revaluated between this difference and the company’s observed
asset methods), the multiples method is even more value
relevant if it reduces the difference between the
company’s estimated value and its market value as if it RAVE~ jVobs{is j:
was listed, or its observed value as it is itself listed. Vobs

Sample companies and data Alternatively, any RAVE can be calculated by

The study we conducted compares the relative absolute comparing any estimated multiple (Mest) and its corre-
valuation error (RAVE) resulting from the application of sponding observed multiple (Mobs):
the most common valuation multiples for a sample of
listed companies within industry peer groups.2To set the jMobsis j:
RAVE~
sample, we used data from FactSet: market capitalization, Mobs
actual financial statements (i.e., invested capital and net
debt), and financial analysts’ Sales, EBITDA, and EBIT
For any company within a peer group, the lower the
earnings estimates consensus.
RAVE resulting from the application of a multiple is,
As of March 31 of each year, we selected firm-years
the more the multiples method is relevant. It is thus
that satisfy the following criteria:
possible to compare the relevance of different multiples
Western European companies disclosing consol- by comparing the RAVE resulting from their application.
updated financial statements in IFRS GAAP Within a peer group or a sample of comparable companies
All required data being nonmissing and non- the most relevant synthetic valuation multiples
negative for fiscal years 2006, 2007, and 2008 (i.e., (EV/Sales, EV/EBITDA, or EV/EBIT) are those that
all multiples can be observed and are positive minimize the average RAVE within the sample.
(3) Each industry-year peer group including at least All things being equal, one can consider that within
five companies a peer group, the valuation multiple that should be used to
All multiples lying within the 5th and 95th identify mispriced companies would be the one that
percentiles of each fiscal year. minimizes the RAVE of the companies within the peer
The resulting sample includes 919 observations in group. All things being equal, one can consider that for
2006 representing 24 countries and 59 industries, 1,090 in a privately held company comparable to those composing
2007 (24 countries and 66 industries), and 1,192 in 2008 the peer group, the more relevant multiples would be
(27 countries and 70 industries). those that minimize the RAVE of the companies within
Valuation multiples used for the study are those that the peer group.
appear the most frequently considered by financial To calculate the RAVE of each company within
analysts by reference to the studies of Chastenet and industry peer groups we followed the following steps:
Jeannin (2007) and Harbula (2009): Enterprise Value
(1) Setting industry peer groups by grouping com-
(EV) to Sales, EBITDA, and EBIT (supplemented by the
companies from the same industry according to the
companies' Capital Employed multiples: EV/CE) where
Financial aggregates refer to actual (subscript: 0), current best FactSet industry classification (i.e., level 2).
(subscript: 1), and forecast (subscript: 2) data, as reported (2) Calculating the observed valuation multiples of
by financial analysts, both for the former (actual) and the each company (considering available data as at
latter (current and forecast), and consolidated by FactSet March 31 of each year, 2006, 2007, and 2008:
in its consensus. market capitalization, net debt (short-term and
long-term debt less cash and long-term investments
Relative absolute valuation errors actual, current, and forecast Sales
For any company within a peer group, we defined the EBITDA and EBIT as provided by financial analysts
valuation error resulting from the application of industry- consensus (see Table 1: descriptive statistics of
based multiples as the difference between its estimated multiples, as at March 31, 2008).
value (Vest) and its observed value (Vobs) and the relative (3) Calculating the synthetic multiples of each
industry peer group, corresponding to the arithmetic
2The results of that study were also published in French in the Revue metric or the harmonic mean of the observed
French Management (Astolfi, Chastenet, Marion, and Thauvron, 2014). multiples of their constituent companies.

Page 176 2015, American Society of Appraisers

 Valuation Using Industry Multiples

Table 1
Distribution of Multiples and Related Relative Absolute Valuation Errors (RAVE), European Peer Groups, March
31, 2008

CE0 Sales0Sales1Sales2EBITDA0EBITDA1EBITDA2EBIT0 EBIT1 EBIT2

EV Multiple
3rd Quartile (75%) [Link].5 39.9 38.5 37.5 314.2311.8310.4
Median [Link].9 37.8 36.9 36.3 311.1 39.5 38.6
1st Quartile (25%) [Link].6 36.3 35.7 35.2 38.6 37.8 37.0
Standard Deviation [Link].7 33.0 32.1 31.7 35.1 33.0 32.4
Mean (Harmonic) [Link].8 37.6 36.7 36.1 310.6 39.2 38.2
RAVE
3rd Quartile (75%), % 58 54 52 51 34 29 27 38 30 27
Median, % 36 33 31 31 20 17 17 23 18 17
% 18 16 15 15 10 8 7 11 9 8
Interquartile Range, % 40 38 37 36 23 21 20 27 21 19
% 42 39 38 37 24 20 19 27 21 19
Rank-Median 10 9 7 8 5 3 1 6 4 2
Rank-Interquartile Range 10 9 8 7 5 4 2 6 3 1
Rank-Mean 10 9 8 7 5 3 1 6 4 2

Notes: EV5actual enterprise value (market capitalization as at March 31, 2008, plus actual fiscal year book value of net debt: minority
interests, plus other long-term liabilities and financial debts less cash and cash equivalents and other long-term investments reported by
FactSet); EV Multiple5 company's EV divided by the selected value drivers: CE5 capital employed (book value of fixed assets and
working capital current assets and liabilities reported by FactsSet; 0 subscript is last fiscal year); Sales5revenues; EBITDA5earnings
before interest, taxes, depreciation, and amortization; EBIT earnings before interest and taxes (0, 1, and 2 subscripts are FactSet
financial analysts’ consensus for last, current, and next fiscal year Sales, EBITDA, and EBIT). RAVE is the absolute difference between
company’s observed value and estimated value, divided by observed value. Estimated value is equal to the harmonic mean of industry
peer group’s EV multiples applied to the selected value driver of the company (that company being held in the peer group). Sample is
1,192 companies for all variables (from 27 countries and 70 industries).

Figure 1
Distribution of Relative Absolute Valuation Errors (RAVE), European Industry Peer Groups, March 31, 2008. Notes: The
lower (higher) bound of the vertical line corresponds to the 1st (3rd) quartile of the RAVE distribution. When the rectangle
in the middle of the line is gray, its bottom is the median and the top is the mean of the RAVE distribution; when it is dark,
it is the opposite.

Business Valuation Review — Winter 2015 Page 177

Business Valuation Review

Table 2
Distribution of Multiples and Related Relative Absolute Valuation Errors (RAVE), Luxury Industry Peer Group,
April 30, 2011

CE0 Sales0Sales1Sales2EBITDA0EBITDA1EBITDA2EBIT0 EBIT1 EBIT2

EV Multiple
3rd Quartile (75%) [Link].9 314.2 311.9 310.4 318.8315.4313.4
Median [Link].6 312.1 310.4 39.5 315.2312.9311.5
1st Quartile (25%) [Link].0 311.3 310.0 38.9 313.0311.5310.2
Standard Deviation [Link].0 34.6 33.7 33.0 38.7 36.1 34.5
Mean (Harmonic) [Link].3 312.9 311.3 310.0 316.0313.7312.1
RAVE
% 74 29 25 24 28 23 21 28 23 23
Median, % 41 20 21 18 14 12 12 23 19 16
% 22 12 11 11 7 10 7 7 9 8
Interquartile Range, % 52 17 14 14 21 14 14 22 14 14
Mean, % 47 29 28 26 19 17 16 22 20 18
Rank-Median 10 7 8 5 3 2 1 9 6 4
Rank-Interquartile Range 10 7 4 3 8 1 2 9 5 6
Rank-Mean 10 9 8 7 4 2 1 6 5 3

Notes: EV5 actual enterprise value (market capitalization as of April 30, 2011, plus actual fiscal year book value of net debt: minority
interests, plus other long-term liabilities and financial debts less cash and cash equivalents and other long-term investments reported by
FactSet); EV Multiple5company’s EV divided by the selected value drivers: CE5capital employed (book value of fixed assets and
working capital current assets and liabilities reported by FactsSet; 0 subscript is last fiscal year); Sales5revenues; EBITDA5earnings
before interest, taxes, depreciation, and amortization; EBIT refers to earnings before interest and taxes (0, 1, and 2 subscripts are FactSet)
financial analysts’ consensus for last, current, and next fiscal year Sales, EBITDA, and EBIT). RAVE is the absolute difference between
the company's observed value and estimated value, divided by observed value. Estimated value is equal to the harmonic mean of industry
peer group's EV multiples applied to the selected value driver of the company (that company being held in the peer group). Sample is
twelve companies: Bulgari S.P.A.; Burberry Group PLC; Coach Inc.; Compagnie Financiere Richemont S.A.; Hermes International
S.C.A.; Hugo Boss AG; Luxottica Group S.p.A.; LVMH Moet Hennessy Louis Vuitton; PPR S.A.; Swatch Group AG; Tiffany & Co.;
Tod's S.p.A.

(4) Calculating the RAVE of each company multiple, Empirical Results

by comparing its observed value to its estimated Our study allows us to classify the most commonly used
value for each of the synthetic multiples previously valuation multiples according to their level of relevance
calculated. (i.e., their ability to reduce the RAVE) and thus provide the
(5) Ranking the sample companies’ RAVE according appraisers with a set of general results that are listed below:
to different statistics (quartiles, median, interquartile range)
For the calculation of peer group synthetic multiples
tile range, and mean of RAVE).
the harmonic mean should be preferred to the
Table 1 presents the descriptive statistics of the sample arithmetic mean (based on Liu, Nissim, and
for the multiples and RAVE as at March 31, 2008, and Thomas 2007, an alternative to the use of the
the ranking of multiples according to the different statistics harmonic mean to reduce the valuation bias is the
tics (Figure 1 provides a graphical presentation of the use of the median of the multiples).
distribution of RAVE).3 Appraisers should favor the use of EV to earnings
As part of academic work that resulted in the article, multiples (EBITDA or EBIT) compared to multi-
the validity of the results of the empirical study was based ples of Sales or Capital Employed (as earnings can
on achieving statistical parametric pairwise comparison of be considered as better estimates of companies’
means, variances, and proportions (with similar results for cash flows)
the three samples studied as at March 31, 2006, 2007, and 3. When they have them, appraisers should give
2008). preference to the most forward-looking multiples
(current and/or forecast) (as forward-looking earn-
3In Table 1, the observed value of each company is compared to its ings can be considered better estimates of compa-
estimated value resulting from the application of the synthetic multiples, the companies’ future expected cash flows.
company to be evaluated being held in the peer group. As shown in Table
A1 and Figure A1, excluding that company from the peer group provides 4. When they do not have forward-looking multiples
similar results (nevertheless, with RAVE that are logically higher). (often the case when valuing privately held

Page 178 2015, American Society of Appraisers

 Valuation Using Industry Multiples

Figure 2
Distribution of Relative Absolute Valuation Errors (RAVE), Luxury Industry Peer Group, April 30, 2011. Notes: The
lower (higher) bound of the vertical line corresponds to the 1st (3rd) quartile of the RAVE distribution. When the rectangle
in the middle of the line is gray, its bottom is the median and the top is the mean of the RAVE distribution; when it is dark,
it is the opposite.

companies), appraisers should generally favor the valuation based on the industry-based multiples method
use of EBITDA over EBIT multiples (as EBITDA could not be considered as the most relevant choice.
would be the best estimates of cash flows; this last Our two case studies demonstrate that the general
result is confirmed for almost 75% of the industry results of our study can be reversed for some industries
peer groups in our sample). (when comparing the relevance of the EV/EBIT and EV/
EBITDA multiples, for example). However, the RAVE
Beyond these general results (some of which have
The approach can be used case by case and in many evaluations.
already been published in the literature), one of the
contexts (e.g., M&A, Financial Analysis, Fairness)
interesting aspects of the RAVE analysis is that it can be
Opinions, Impairment Tests.
implemented by any appraiser in any valuation cases to
identify and justify the preferred use of one multiple Conclusion
rather than another. Our study reveals that many of the most common
Case Studies valuation multiples do not all have the same level of
relevance when one looks at the relative absolute
We address the particular case of luxury and the
valuation error (RAVE) that derives from their applica-
cosmetics industries considering the valuation multiples Our empirical results are of general consideration
observed as of April 2011. Table 2 and Figure 2 and but need to be checked case by case. We show how the
Table 3 and Figure 3, respectively, show the descriptive The use of RAVE can be adopted in any valuation study.
statistics of multiples and RAVE for the peer groups that The objective of this article is to recall that the
are most representative of the selected industries. multiple methods, although it appears simple, is based on
At the date of valuation (end of April 2011), in the solid theoretical foundations like the DCF method and
luxury sector, considering both the mean and median of requires specific tools to improve the efficiency of the
RAVE (16% and 12%, respectively), the multiple based evaluation process based on a value relevance measure to
of forecast EBITDA was the most relevant. In the mitigate the risks of unexpected errors or voluntary
cosmetics industry, considering both the mean and manipulation of results of valuation (especially regarding
median of RAVE (6% and 5%, respectively), the the selection of the multiples). The best multiple should
forward-looking EV/EBIT was more relevant than the be the one that minimizes RAVE within any peer group.
corresponding EV/EBITDA multiple. In that industry In this article, we do not address other issues attached.
case, the relevance of EBITDA for the purpose of to the multiples method raised in other empirical studies:

Business Valuation Review — Winter 2015 Page 179

Business Valuation Review

Table 3
Distribution of Multiples and Related Relative Absolute Valuation Errors (RAVE), Cosmetics Industry Peer Group,
April 30, 2011

CE0 Sales0Sales1Sales2EBITDA0EBITDA1EBITDA2EBIT0 EBIT1 EBIT2

EV Multiple
3rd Quartile (75%) [Link].3 315.9 313.3 311.4 316.9315.7313.5
Median [Link].1 312.9 311.8 310.9 316.1314.7312.8
1st Quartile (25%) [Link].4 310.5 311.8 310.3 313.9314.6312.4
Standard Deviation [Link].7 33.4 31.9 31.7 33.5 31.0 30.9
Mean (Harmonic) [Link].7 312.3 311.5 310.2 315.9315.1313.0
RAVE
3rd Quartile (75%), % 191 42 41 40 29 16 17 17 6 6
Median, % 190 36 36 36 27 16 12 13 4 5
1st Quartile (25%), % 69 32 26 25 15 2 8 6 3 4
% 122 9 16 15 14 14 9 10 3 3
Mean, % 138 48 42 38 23 12 12 15 5 6
Rank-Median 10 7 8 9 6 5 3 4 1 2
Rank-Interquartile Range 10 4 9 8 7 6 3 5 2 1
Rank-Mean 10 9 8 7 6 3 4 5 1 2

Notes: EV5actual enterprise value (market capitalization as of April 30, 2011, plus actual fiscal year book value of net debt: minority
interests, plus other long-term liabilities and financial debts less cash and cash equivalents and other long-term investments reported by
FactSet); EV Multiple 5 company’s EV divided by the selected value drivers: CE 5 capital employed (book value of fixed assets and
working capital current assets and liabilities reported by FactsSet; 0 subscript is last fiscal year); Sales5revenues; EBITDA5earnings
before interest, taxes, depreciation, and amortization; EBIT earnings before interest and taxes (0, 1, and 2 subscripts are FactSet
financial analysts’ consensus for last, current, and next fiscal year Sales, EBITDA, and EBIT). RAVE is the absolute difference between
company’s observed value and estimated value, divided by observed value. Estimated value is equal to the harmonic mean of industry
peer group’s EV multiples applied to the selected value driver of the company (that company being held in the peer group). Sample is
five companies: Beiersdorf AG; Estee Lauder Cos.; L’Oreal S.A.; Natura Cosmeticos S.A.; Shiseido Co. Ltd.

Figure 3
Distribution of Relative Absolute Valuation Errors (RAVE), Cosmetics Industry Peer Group, April 30, 2011. Notes: The
lower (higher) bound of the vertical line corresponds to the 1st (3rd) quartile of the RAVE distribution. When the rectangle
in the middle of the line is gray, its bottom is the median and the top is the mean of the RAVE distribution; when it is dark,
it is the opposite.

Page 180 2015, American Society of Appraisers

 Valuation Using Industry Multiples

what criteria should be used to select companies that are Harbula, P. 2009. "Valuation Multiples: Accuracy and
really the most comparable within an industry peer group Drivers Evidence from the European Stock Market.
(e.g., market segment, profitability, and/or growth pro- Business Valuation Review 28 (Winter):186–200.
aspects)? How can one justify the combination and the Herrmann, V., and F. Richter. 2003. “Pricing with
weighting of the valuation results derived from the use Performance-Controlled Multiples.
different multiples (such as Capital Employed and EBIT, Business Review55 (July):194–219.
or EBITDA and EBIT)? Hitchner, J. R. 2006. Financial Valuation—Applications
and Models. 2nd ed. Hoboken, N.J.: Wiley.
References
IVSC, 2001. "International Valuation Guidance Note
Astolfi, P., E. Chastenet, A. Marion, and A. Thauvron. No. 6. Business Valuation.” International Valuation
2014. "Method of multiples. Contribution to the evaluation
Standards.
business valuation. French Review of Management
Valuing IPOs
(June/July): 48–51.
of Financial Economics53 (September):409–437.
Baker, M., and R. Ruback. 1999. “Estimating Industry
Koller, T., M. Goedhart, and D. Wessels. 2005.
Multiples. Working paper, Harvard University, Cam-
Valuation: Measuring and Managing the Value of
bridge, Mass.
Companies. 4th ed. Hoboken, N.J.: Wiley.
Chastenet, E., and G. Jeannin. 2007. “Evaluation
Lie, E., and H. J. Lie. 2002. "Multiples Used to Estimate
of the company: The methods applied by the analysts
Corporate Value. Financial Analysts Journal 58
financiers."Financial Analysis Review 24 (July):48–51.
(March/April):44–54.
Crow, M. R., A. K. Gibbs, and T. W. Harms. 2001.
Valuation for Impairment Testing—The Finance and Liu, J., D. Nissim, and J. Thomas. 2002. "Equity"
Accounting Professional’s Guide to Valuing Reporting Valuation Using Multiples. Journal of Accounting
Units for Compliance with SFAS 142. Mercer Capital, Research40 (March):135–172.
Brockton, MA: Peabody Publishing. Liu, J., D. Nissim, and J. Thomas. 2007. "Is Cash Flow
Esty, B. C. 2000. “What Determines Comparability When King in Valuations?” Financial Analysts Journal 63
Valuing Firms with Multiples? Journal of Financial (March/April):56–65.
Education2 (Fall):24–33. Miller, M. H., and F. Modigliani. 1961. “Dividend
Fama, E. F. 1970. “Efficient Capital Markets: A Review Policy, Growth and the Valuation of Shares. Journal
of Theory and Empirical Work."Journal of Finance25 of Business34 (October):411–433.
(May):383–417. Modigliani, F., and M. H. Miller. 1958. “The Cost of
FASB, "Goodwill and Other Intangible Assets SFAS No. Capital, Corporation Finance, and the Theory of
142. Statement of Financial Accounting Standards. Investment. American Economic Review 48 (June):
Fisher, I. 1907. The Rate of Interest: Its Nature, 261–297.
Determination and Relation to Economic Phenomena. Schreiner, A. 2007. Equity Valuation Using
New York: Macmillan. Multiples: An Empirical Investigation. Wiesbaden:
Gordon, M. J., and E. Shapiro. 1956. "Capital Investment" German University Press.
Analysis: The Required Rate of Profit. Williams, J. B. 1938. The Theory of Investment Value.
Science3 (October): 102–110. Cambridge, Mass.: Harvard University Press.

Business Valuation Review — Winter 2015 Page 181

Business Valuation Review

Appendix different statistics, when the company is to be evaluated

Table A1 presents the descriptive statistics of the is being excluded from the peer group (Figure A1
sample for the multiples and RAVE as at March 31, provides a graphical presentation of the distribution of
2008, and the ranking of multiples according to the RAVE).

Table A1
Distribution of Multiples and Related Relative Absolute Valuation Errors (RAVE), European Peer Groups, March
31, 2008

CE0 Sales0Sales1Sales2EBITDA0EBITDA1EBITDA2EBIT0 EBIT1 EBIT2

EV Multiple
3rd Quartile (75%) [Link].5 39.9 38.5 37.5 314.2311.8310.4
Median [Link].9 37.8 36.9 36.3 311.1 39.5 38.6
1st Quartile (25%) [Link].6 36.3 35.7 35.2 38.6 37.8 37.0
Standard Deviation [Link].7 33.0 32.1 31.7 35.1 33.0 32.4
Mean (Harmonic) 32,630,930,930.8 37.6 36.7 36.1 310.6 39.2 38.2
RAVE
75% 62 56 55 54 35 30 29 41 32 29
Median, % 38 35 33 33 21 18 18 24 19 17
1st Quartile (25%), % 19 17 16 16 11 8 8 12 10 8
Interquartile Range, % 43 39 38 38 24 22 21 28 22 20
Mean, % 45 43 41 40 25 21 20 29 23 20
Rank-Median 10 9 7 8 5 3 2 6 4 1
Rank-Interquartile Range 10 9 8 7 5 3 2 6 4 1
Rank-Mean 10 9 8 7 5 3 1 6 4 2

Notes: EV5 actual enterprise value (market capitalization as of March 31, 2008, plus actual fiscal year book value of net debt: minority
interests, plus other long-term liabilities and financial debts less cash and cash equivalents and other long-term investments reported by
FactSet); EV Multiple 5 company’s EV divided by the selected value drivers: CE 5 capital employed (book value of fixed assets and
working capital current assets and liabilities reported by FactsSet; 0 subscript is last fiscal year); Sales5revenues; EBITDA5earnings
before interest, taxes, depreciation, and amortization; EBIT earnings before interest and taxes (0, 1, and 2 subscripts are FactSet
financial analyst consensus for last, current, and next fiscal year Sales, EBITDA, and EBIT). RAVE is the absolute difference between
the company's observed value and estimated value, divided by observed value. Estimated value is equal to the harmonic mean of industry.
peer group's EV multiples applied to the selected value driver of the company (that company being excluded from the peer group).
Sample is 1,192 companies for all variables (from 27 countries and 70 industries).

Page 182 2015, American Society of Appraisers

 Valuation Using Industry Multiples

Figure A1
Distribution of Relative Absolute Valuation Errors (RAVE), European Industry Peer Groups, March 31, [Link]: The
lower (higher) bound of the vertical line corresponds to the 1st (3rd) quartile of the RAVE distribution. When the rectangle
in the middle of the line is gray, its bottom is the median and the top is the mean of the RAVE distribution; when it is dark,
it is the opposite.

Business Valuation Review — Winter 2015 Page 183