Market Multiples - Why They Disagree

Transcription

1 Market Multiples - Why They Disagree presented by Warren Burkholder CBI, MCBA, ASA, ABAR, MAFF Fellow of the IBBA 1

2 To bring to your awareness why different market multiples from the same data set give us very different values for the Most Probable Selling Price of our Subject Business and how we should respond. OBJECTIVE 2

3 CITY CYCLES A motorcycle dealership somewhere! 3

4 Example City Cycles This motorcycle shop has paid you an initial fee to prepare a broker s opinion of value for the Most Probable Selling Price of the business. They need to sell so they can move to a drier climate for health reasons. 4

5 The Recasted Income & Expense Statement You carefully go through and recast the Income and expense statement. You review your work with another experienced broker and feel you have «nailed it» 5

6 The Recasted Income & Expense Statement City Cycles - Restated Earnings

7 The Recasted Balance Sheet City Cycles as of December 31,

8 Optimum Sale Structure? Asset of Stock Sale? Owner financed or third party financed? Current Assets Sold? Accounts Receivable? Inventory? Other Current Assets? 8

9 Benchmarking the Subject with Bizminer. NAICS Code 9

10 Benchmarking the Subject with Bizminer. 10

11 Optimum Sale Structure? 11

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19 Statistics of the Data? 19

20 Calculation of Values 20

21 OPTION A Go With the lowest $ value because you can sell the business faster and its bad to keep the Business on the market looking for too high of a price. 21

22 OPTION B Go for the highest price that way your more likely to get the listing. Besides the MARKET will decide what the Business will sell for. It s almost never what the Seller asks for. 22

23 OPTION C Compromise take the average of the three values. No point in wasting time trying to figure out what you can t control. Besides this looks like an average value for the market. 23

24 Warning The IBBA BBS-II STANDARD OF CONDUCT SAYS: I pledge to protect and promote the best interest of the CLIENT and perform ALL services with integrity, honesty, care, good faith, and fair dealing. 24

25 What Factors Contribute to this Difference? A. Relative profitability? B. Owner Compensation? C. Percent of Tangible Assets of Sale Price? D. Relative Size Difference? E. Financing Structure of the Sale? 25

26 Relative Profitability 26

27 Relative Profitability Subject is clearly more profitable than the Industry Subject is more profitable than the Median of the Market Data Subject is slightly more profitable than the Average of the Market Data Therefore, the Sale Price/Revenue ratio understates the the value and because this Ratio shows a significantly weaker correlation and higher variance than the other two ratios it should be given much less credibility in your conclusion 27

28 Owner Compensation 28

29 Owner Compensation The Subject has Owner Compensation that is slightly higher than the Median but well below the Average of both the Market Data and the Industry. Therefore, The EBITDA ratios maybe be tending to overstate the value of the Subject. 29

30 Percent of Tangible Assets of Sale Price? This Chart shows the Tangible Assets as a % of Revenue. How does the percent Tangible Assets effect the Sale Price/SDE ratio? 30

31 Percent of Tangible Assets of Sale Price? 31

32 Relative Size Difference 32

33 Relative Size Difference No apparent affect of the size of annual revenue on multiples of earnings. 33

34 Financing Structure of the Sale? Insufficient information to determine if financing structure effects sale price in the market place. However, does the presence of third party ( SBA) financing logically increase or decrease the MPSP for any given transaction? We have selected Market Data that is biased in favor of third party financing. 34

35 Conclusions The two most important factors effecting the difference between the three most commonly used Market Multiples $SP/ Rev, $SP/DE, and $SP /EBITDA suggests that two factors appeared to have the biggest impact. A. Relative profitability - Suggests values of DE and EBITDA are more relevant. B. Owner Compensation Suggests EBITDA ratio may include some overpricing bias. C. I would select a price some where between the DE ratio and the EBITDA ratio. 35

36 Conclusions The objective today is to demonstrate that with some diligence on your part you can give your clients advice that is something better than an ignorant guess. 36

37 THANK YOU for ATTENDING QUESTIONS? Please complete the Workshop Valuation Form 37