How are valuation multiples determined?
By thoroughly reviewing a business and understanding its risk profile, we can determine the required rate of return and then convert that into a business valuation multiple.
Factors such as the business’ size, key person reliance, industry, age, and composition of suppliers and customers are all considered when undertaking this assessment.
A high risk business would only attract an investor (or buyer) if they could receive a high rate of return. Conversely, a business that is considered to be a low risk would attract buyers willing to accept a lower rate of return. For example, Government bonds may only offer a return around 2% but because they are considered to be (almost) risk free, this is seen as an acceptable rate of return by investors.