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9-206-095

REV: OCTOBER 31, 2006

ROBIN GREENWOOD
LUCY WHITE

Introduction to Valuation Multiples

Table 1

op yo A multiple is a market price per unit, which, when multiplied by the number of units, gives the value of those units. We use multiples regularly in our everyday lives without even realizing it. For example, to determine the value of a bag of fish, we multiply the price of fish per pound (the multiple) by the weight of fish in the bag (the number of units). Below are some more examples of multiples you may have used.
Everyday Multiples

Quantity

X

Pounds of fish
Bushels of apples
Gallons of gasoline
Number of square feet

X
X
X
X

Multiple

$ per pound
$ per bushel
$ per gallon
$ per square foot

=

Value

=
=
=
=

Cost of fish
Value of apples
Price of tank of gas
Value of property

No

tC

In real estate transactions, realtors often make a first estimate of the value of a property based on the number of square feet times the prevailing price per square foot in the locality. For example, if the average price per square foot in your neighborhood is $500, you might think you got a good deal if you acquired a 1000-square-foot apartment for less than $500,000. Although multiples present an efficient way to value an item, they also pose risks. Not all 1000-square-foot apartments in a particular neighborhood sell for the same price. Other factors, such as supply, condition, and location of the apartments, may affect the price as well. The risks in applying one multiple ($500/square foot) to all real estate in an individual locality are common to all uses of multiples. Thus, it is important to keep in mind the following basic principles:
Multiples are used appropriately when comparing two assets that are similar in nature: One reason why the price per square foot seems to vary