The Most Common Business Valuation Method

Part one of our business valuation series explored the importance of defining the purpose of valuation. In this second installment, we’ll focus on the comparative method—a widely used but often oversimplified approach that boils down to multiplying two figures: a “magic” market multiple and a company’s profit level (e.g., EBITDA or net income). In this article, we break down why the devil is in the details—and how shortcuts can lead to misleading results.

Valuing a Company Using the Comparative Method

The comparative method, also referred to as the multiples method, involves benchmarking the company being valued against similar businesses with known market values (e.g., public companies). This approach requires answering two key questions:

Where to find reliable data on comparable company valuations?

There are two main sources of comparable company valuation data:

• Publicly traded companies – whose market value is continuously updated via stock price. When combined with the number of outstanding shares (which is publicly available via stock exchange databases or national registers), this gives us the company’s market capitalization (Market Value – MV).

• Private M&A transactions – these require more sophisticated analysis, as detailed deal terms are often not disclosed. The transaction value may need to be estimated based on the acquirer’s balance sheet or derived from footnotes in financial reports.

Which multiples should be used in business valuation?

Over the years, we’ve encountered a wide range of creative valuation multiples proposed by company owners—from number of employees to production floor area. In practice, however, a few key multiples have become standard:

• P/E (Price-to-Earnings) – a simple and commonly used multiple, calculated as the company’s market value divided by its annual net profit.
Example: If a publicly listed company is valued at PLN 100 million and its net profit is PLN 10 million, the P/E ratio is 10x (100M / 10M). If your company earns PLN 5 million in net profit, applying the same multiple would result in a valuation of PLN 50 million.

• P/BV (Price-to-Book Value) – similar to P/E, but instead of net profit, it uses the company’s book value, typically calculated as shareholders’ equity.

• EV/EBITDA – enterprise value to EBITDA (earnings before interest, taxes, depreciation, and amortization). This ratio requires breaking down a few components:

• EV (Enterprise Value) – calculated as market capitalization (MV) minus net debt (total interest-bearing liabilities less cash). If cash exceeds debt, you may end up with a “net cash” situation, which increases EV.
• EBITDA – calculated by adding back depreciation and amortization to operating profit (EBIT).

Alongside P/E, EV/EBITDA is one of the most frequently used valuation multiples. However, it offers a more nuanced view by factoring in additional elements that impact a company’s valuation, including:

• Leverage and cash reserves – Two companies with similar profitability but different levels of financial leverage will be valued differently under this method.
• Cash-based profitability – EBITDA excludes depreciation, a non-cash accounting expense, which makes it more reflective of operating cash flow. Adjustments may also be made for one-off events such as grants or asset impairments to reflect true business performance.

• EV/S (Enterprise Value / Sales) – a less common but useful ratio, particularly for businesses in a high-growth phase with low or negative profitability (e.g., fast-scaling companies, startups, or those developing a unique product or service).

Common Mistakes in Applying the Comparative Method

The comparative method is often considered a quick and easy way to estimate company value—mainly because public data is readily accessible and industry platforms often calculate common valuation multiples automatically. This can lead to oversimplified assumptions and significantly different results across calculations. In our view, several key factors contribute to these discrepancies:

Poor Selection of Comparable Companies

When using the comparative method, it is essential to select companies with the most similar business models and operational scale. This can be difficult when there are few public companies representing a particular niche or when the companies differ significantly in size or market maturity. Listed corporations may be much larger and more established than private businesses in the same space, and unique characteristics may distort valuation multiples within the same industry.

That’s why peer selection should be grounded in detailed research and clearly justified. Any material differences in business model or scale should be disclosed and reflected in the final valuation—often through the use of expert judgment or applying valuation discounts.

Wrong Timing and Inconsistent Timeframes

Valuation data for public companies fluctuates daily and reflects expectations for future events. It is critical to match the time periods used for the financial metrics (net income, EBITDA, revenue, etc.) with the exact date of the valuation. This is often easier said than done due to varying financial reporting schedules between public and private companies.

Incorrect Choice of Multiples and Weighting

Different valuation multiples can produce vastly different outcomes for the same company. For this reason, professional valuations often use 2–3 metrics and apply a weighted average. The choice of multiples—and how much weight each carries—must be well thought out and properly justified.

The above elements and stages of comparative valuation are just the core of what’s required for a reliable, professional assessment. The accuracy of a valuation largely depends on the depth of analysis, the rigor of the calculations, and the expertise of the person performing it.

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