I just read three recent articles on EBITDA.
Quite interesting to see how EBITDA got challenged though it is used widely in the valuation. EBITDA so far is still seen as a clean measure of what the business has generated, separate from its capital or financing structure and investment. Since we are more interested in the risk of the company’s underlying business operations, then EBITDA seems to me, is relevant to use.
Comments from Ignacio Velez-Pareja:
You might guess what I think of EBITDA.
First of all, I prefer to show THREE financial statements: CB, P&L and BS.
When you do that, you have the best shortcut to CF: CCF = CFD+CFE and these two are seen directly in the CB as the negative of the financing module (3) and the equity transactions module (4). That’s it.
I think that valuation by multiples is still a questionable.
I do calculate multiples just to compare the calculated value with real transactions, not the contrary. I mean, multiple calculation should be done AFTER, valuation (DCF) in order to be compared with similar transactions. I just remember one firm that approached us saying that they were offered to buy the firm by 7 x EBITDA and asked if we could give an opinion on that. We said we had NFI if it was good or not to sell it to the English firm that made the offer. We explained the idea of DCF and that after that we could give our opinion. In short, we valuated the firm, we were very critical and conservative to any input to be included, such as real growth rates and real price increases and we found that EV/EBITDA might range between 12-17. After a couple of years I met the owners and they told me they didn’t accept the offer and that our estimate of multiple was still conservative. They were very happy with their decision not to sell.
Regarding the terminal value, TV, yes, it might be a Pandora’s Box. We usually have 3 estimates for TV: Invested Capital at year N, non-growing perpetuity and growing perpetuity. We try that PV(TV) is around 20%-30% of EV.
Bottom line: I stick to DCF.
Note from Karnen: DCF is of course, the most “technical” analysis, compared to the other techniques in the Valuation for M&A, they are Comps and Precedent Transactions. However, the necessity to use Perpetuity in the DCF analysis is still quite problematic as it could take as much as 80% of the Enterprise Value analysis.