1. Differences in Multiples
Some of the reasons multiples might vary include
different growth rates, higher growth companies typically command a higher
multiple and thus a higher valuation, all else being equal,
differences in the quality of the business or management team,
higher quality businesses with better management should trade at higher
multiples. Mis pricing; a company might simply be mis priced by investors.
When performing a relative valuation, it's easy to see a company with a
low multiple and assume it's undervalued, however, that lower multiple might
be deserved. Conversely, a company might appear to be overvalued, that that
over valuation might be justified based on higher returns or better growth
prospects. Accounting policies affect profits and therefore multiples,
for example, different depreciation methodologies between different companies
will impact net income. For precedent transactions, older deals may not
be representative of the current market for similar assets or companies,
and some transactions may have greater potential synergies than others,
greater synergies may increase the multiple paid for the company.
It's also difficult to find transactions without a paid subscription service
like Capital IQ. Additionally, there may not be that many transactions within
a given timeframe.
2. Let's practice!