EBITDA Multiples (comparable companies)

Kersten Corporate Finance: We are M&A Consultants from the Netherlands in SME's en medium size companies, both sell side and buy side.

Moreover, we make lots of business valuations. And once a year, we provide a 6-day valuation training in Uden/ The Netherlands. Next one is: 15 until 21 March 2023 (vd Valk Uden).

Author: Joris Kersten MSc BSc RAB

Uden/ The Netherlands

Source used: Investment Banking: Valuation, leveraged buyouts and mergers & acquisitions. Second edition (2013). Joshua Rosenbaum & Joshua Pearl. Wiley Publishing company. 9781118472200.

Comparable Companies Analysis (multiples-1)

Comparable Companies Analysis (CCA): An Introduction

CCA provides a benchmark against which a M&A consultant can determine a valuation for a private company, or analyse the value of a public moment at a given moment.

With CCA we basically assume that similar companies are a very good reference for valuing a certain target company.

And we use the information for a lot of different issues like M&As (mergers & acquisitions), IPOs (initial public offerings), restructurings, investment decisions etc.

Selection of the comparable companies

When we want to value a certain company; the target, we want to learn as much on this company as we can.

This is in general more easy for public companies since here we have access to the annual reports (10-Ks), consensus research estimates, equity and fixed income research reports, press releases, investor presentations etc.

For private targets this is in general more difficult. But a M&A consultant will often receive detailed business and financial information in an organised M&A sale process (in the form of a confidential information memorandum).

Once we understand the target company, we need to find good comparable companies. Good target companies share both a similar business profile and financial profile.

With a similar business profile we mean: Sector, products and services, customers and end markets, distribution channels, geography etc.

With a similar financial profile we mean: Size, profitability, growth profile, return on investment, credit profile etc.

Usually the best way to find good “comparables” (comps) is to start at the target’s public competitors. Because these companies share key business and financial characteristics, and are susceptible to similar opportunities and risks.

The following sources can be used to get information on the “comps”: 10-Ks, investor presentations, credit rating agencies reports (e.g. Moody’s, S&P, and Fitch), equity research reports, fairness opinions, Bloomberg sector classification etc.

Locate the financial information

Financial information on the “comparable companies” (comps) of the target can be found on: Bloomberg, Bureau van Dijk (Amadeus, Reach and Zephyr), company.info, Factiva, MD info, MergerMarket, OneSource, Thompson one banker etc.

It just depend what kind of database-tools your bank, corporate finance consulting firm, M&A boutique or accounting firm has.

We basically want to know the historical performance of the comps (e.g. LTM financial data) and the expected future performance (e.g. consensus estimates for future calendar years).

Historical information can be found in the annual reports like the 10-Ks. This information is used for balance sheet data, basic shares outstanding, stock options/ warrants, and information on non-recurring items.

And for future performance you can use for example equity research. Research reports provide the M&A consultant with estimates on future company performance like sales, EBITDA and/ or EBIT, and EPS for future quarters and future two or three year periods.

Within this respect, initiating coverage research reports are more comprehensive. And consensus estimates (Bloomberg) are used as basis for calculating forward-looking trading multiples in trading comps.

Key statistics

For all the comps you need key financial statistics and ratios. So you need info on: Size of the company, profitability, growth profile, return on investment and the credit profile.

Size

The size of the comps can be calculated with multiplying the share price of the target times the “fully diluted shares outstanding” (FDSO). FDSO is the basic shares outstanding including the in the money options and warrants and in the money convertible securities.

When we have calculated this, then we have calculated the market value of equity.

When we take the market value of equity and add the (market value) of debt, preferred stock and non-controlling interest (NCI), minus the (excess) cash and cash equivalents, then we have calculated the famous “enterprise value” (EV).

Profitability

For the profitability we want to know the comp’s sales and percentages of gross profit, EBTIDA, EBIT and net income in relation to sales.

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Growth profile

Very important, we need to know how fast the comps has been growing in the past and what the expected growth rate is.

We do this by checking the “Compound Annual Growth Rates” (CAGRs). These CAGRs basically show the average growth per year over a certain amount of years.

Within this respect, it is very interesting to look bottom line at “diluted earning per share”. And here fore historical EPS need to be cleaned for non-recurring items.

Return of investment

We also want to know the returns, like return on equity, return on assets and return on invested capital (EBIT/ (average net debt + equity)).

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Credit profile

And we want to know what the leverage level of the “comp” is, so we need to know “debt over EBITDA” and debt as part of “debt + preferred stock + non-controlling interests + equity” (capital structure).

And we also need to know the “debt coverage”, so for example the interest coverage ratio:

(EBITDA, (EBITDA – Capex), or EBIT)/ interest expense.

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Supplemental financial concepts and calculations?

For multiples we tend to look at LTM numbers in the income statement, so these are numbers from the last twelve months (LTM).

We also tend to “clean” these number for non-recurring items. These are items that most likely only took place once like for example: Inventory write downs and restructuring charges.

Key trading multiples

When we eventually have calculated the clean LTM EBITDAs and EVs (enterprise values) of the “comps”, then we can calculate the EV/ EBITDA multiple of the comps.

Benchmark the comparable companies

When we have calculated all the financial statistics as mentioned above for all the comps, then we need to compare them with the target.

We now need to select the closest comparables in terms of business profile and financial profile. In the end, this is not a science but an art.

For the valuation of the target we in general focus on the two or three closes comparables to frame the ultimate valuation (for the comps).

When we have calculated the “comp-range” in EBITDA multiples this serves as an input for the “valuation football field”.

After this we need to add more input to the “valuation football field” like:

Valuation through precedent transactions, discounted cash flow valuation (DCF) and leveraged buyout valuation (LBOs).

Thanks for reading, best regards, Joris

Kersten Corporate Finance

Source used: Investment Banking: Valuation, leveraged buyouts and mergers & acquisitions. Second edition (2013). Joshua Rosenbaum & Joshua Pearl. Wiley Publishing company. 9781118472200.