What the heck is an Industry Multiplier?

[agm8478]

Now that there are over 500,000 copies out there in the wild, multiple language translations, etc. this is the thread to let me know that you've read The Millionaire Fastlane .



If you read the book, post here and you will get an icon under your screenname and additional forum privileges.

Feel free to post your comments about the book as well!

Thanks, MJ

Hello!

I am reading the book now. but when I got to Ch 18, I got stuck and re-read it a couple of times before I admitted I was in trouble.

I confess I failed high school economics.

And even after I went back and looked up some of the concepts that were confusing, I am still unable to put the pieces together.

What the heck is an Industry Multiplier? Who picked these numbers out? Are they arbitrary? If not, how did they get here and who made them king?

Please forgive my ignorance, I am but a newly freed slave looking to clean off the dirt from the fields.

April Manning

 

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[imdchange]

What the heck is an Industry Multiplier? Who picked these numbers out? Are they arbitrary? If not, how did they get here and who made them king?

Not sure if this helps make things easier, but here goes!

Long story short, An industry multiplier is a number that encompasses the potential value of a company. Typically investment bankers pick out these numbers and 'made them king' based on 'research'. It is somewhat arbitrary, as investment bankers play a 'middle person' and negotiate prices between a company that's a buyer, and the other one that's selling, based on what they know.

STOP HERE if that's sufficient. Otherwise, read on....

To step back a bit, industry multipliers fall under the wider concept of mergers and acquisitions, in which companies consolidate to generally improve their financial performance or reduce their risk within the markets they operate in. This is a situation where one company expresses intent to buy another company. When the two companies are involved in this process, the buyer and the seller have to agree on a price to make the merger happen. Investment bankers facilitate this process, and one of the more common approaches they use to assign value/price to a company is by conducting a comparable company analysis.

The comparable company analysis is a method that comes up with the target company's individual multiplier, and compares it with other similar companies within that industry. The multiplier is calculated based on factors like earnings, potential growth, company size, growth margins, etc.. By doing this across multiple similar companies they can eventually arrive at an average that helps inform future mergers and acquisitions --> the industry multiplier.

 

[Kevin88660]

Hello!

I am reading the book now. but when I got to Ch 18, I got stuck and re-read it a couple of times before I admitted I was in trouble.

I confess I failed high school economics.

And even after I went back and looked up some of the concepts that were confusing, I am still unable to put the pieces together.

What the heck is an Industry Multiplier? Who picked these numbers out? Are they arbitrary? If not, how did they get here and who made them king?

Please forgive my ignorance, I am but a newly freed slave looking to clean off the dirt from the fields.

April Manning

Google price to earning ratio. You will lead you.

 

[agm8478]

Not sure if this helps make things easier, but here goes!

Long story short, An industry multiplier is a number that encompasses the potential value of a company. Typically investment bankers pick out these numbers and 'made them king' based on 'research'. It is somewhat arbitrary, as investment bankers play a 'middle person' and negotiate prices between a company that's a buyer, and the other one that's selling, based on what they know.

STOP HERE if that's sufficient. Otherwise, read on....

To step back a bit, industry multipliers fall under the wider concept of mergers and acquisitions, in which companies consolidate to generally improve their financial performance or reduce their risk within the markets they operate in. This is a situation where one company expresses intent to buy another company. When the two companies are involved in this process, the buyer and the seller have to agree on a price to make the merger happen. Investment bankers facilitate this process, and one of the more common approaches they use to assign value/price to a company is by conducting a comparable company analysis.

The comparable company analysis is a method that comes up with the target company's individual multiplier, and compares it with other similar companies within that industry. The multiplier is calculated based on factors like earnings, potential growth, company size, growth margins, etc.. By doing this across multiple similar companies they can eventually arrive at an average that helps inform future mergers and acquisitions --> the industry multiplier.

It does make sense to say that the number represents what a given company is worth. Whether I need to be concerned with it right now, right where I'm at, is debatable. (I had a much longer and more acerbic response better left for another time. I am a terrible smart aleck when left to my own devices.) But thank you so much for the explanation. I am reading the book carefully and taking notes so that I can actually make use of the tools provided. Cheers!

 

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[MJ DeMarco]

If you own a business that has predictable profit, it can be sold at a multiple -- it is a FACT of finance. The question is, what is the multiple? For private internet businesses it usually ranges from 2-5X net profit per year... so a business that profits $100K per year would be worth $200-500K. The multiple is part of the negotiation. If you try selling a business at a 1X multiple, buyers would line up down the street. Try selling at 50X, and you get no buyers.

To see this in action for public companies (Facebook, Google, Honeywell) simple look at their price-to-earnings ratio ... if it is 10, the company's stock sells at 10X earnings, the multiple is 10.

Hope this helps explain.