Relative valuation is commonly used in the deals negotiation process, namely the EV / EBITDA multiple.
The main factors that explain differences in the EV / EBITDA multiple between sectors and companies within the same sector are: i) the geography of the company’s operations; ii) market dynamics; iii) the characteristics of the company; iv) the profitability of the business; and v) the investment requirements and returns on investment.
Below are some of the critical points to consider for each factor:
These factors explain why, on average, companies in the construction sector tend to trade at lower multiples than software companies, while the industrial sector sits at an intermediate level.
The construction sector is typically exposed to economic cycles, has low margins, and requires high investments in assets and working capital, resulting in a lower multiple. The industrial sector, with moderate growth and margins, tends to have intermediate multiples. Finally, the software sector, characterized by strong growth, high profitability, and low investment needs, typically trades at higher multiples.
