Our latest study shows once again that company size has an influence on valuation multiples. Small companies in particular are valued at a discount to larger companies, while larger companies benefit accordingly from higher multiples. These findings are consistent with our previous studies, which show that investors attribute a more stable market position and lower risks to larger companies.
Status quo and problems
The Swiss small and medium enterprises (SME) market is highly dynamic in terms of succession planning, management buyouts, and mergers and acquisitions (M&A). For any transaction, the parties require a valuation basis on which to negotiate. Multiples from comparable transactions are often used for this purpose. This approach involves assessing the valuations of companies from previous transactions relative to the EBIT(DA) or revenue of the company being sold. Ideally, this ratio (multiple) should be consistent for companies in the same sector with similar size, risk, and growth prospects.
A key challenge in valuation of SME is that multiples from large companies are often applied, as data from their transactions is more readily available. However, in such cases, a size discount should be factored in. In practice, there is often disagreement about the appropriate magnitude of this discount.
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