Date post: | 07-May-2015 |
Category: |
Health & Medicine |
Upload: | pya |
View: | 445 times |
Download: | 9 times |
Page 1October 25, 2013
NACVA Georgia State Chapter Meeting
Market Approach: Adjusting Valuation Multiples
October 25, 2013
William B. Hamilton, MBA, CVA
Page 2October 25, 2013
NACVA Georgia State Chapter Meeting
Agenda
IntroductionIntroduction
Adjusting for SizeAdjusting for Size
Adjusting for Growth and CSRAdjusting for Growth and CSR
ConclusionConclusion
Market Approach ResourcesMarket Approach Resources
Page 3October 25, 2013
NACVA Georgia State Chapter Meeting
Introduction
“Finkel is Einhorn, Einhorn is Finkel.”
- Ace Ventura
The income approach is the market approach,the market approach is the income approach.
A multiple of 5X is a capitalization rate of 20%,a capitalization rate of 20% is a multiple of 5X.
Page 4October 25, 2013
NACVA Georgia State Chapter Meeting
Introduction
Cap rateInverse of valuation multiple
5X EBITDA = “an EBITDA capitalization rate of 20%”
Page 5October 25, 2013
NACVA Georgia State Chapter Meeting
Introduction
PGC multiple = 8XConvert to cap rate = 12.5%Add size adjustment1 = 5.0%Add growth adjustment2 = 2.5%Subject company cap rate = 20.0%
Convert to multiple = 5X
1 Subject size premium less PGC size premium.2 PGC growth rate less subject growth rate.
Page 6October 25, 2013
NACVA Georgia State Chapter Meeting
Adjusting for Size
Page 7October 25, 2013
NACVA Georgia State Chapter Meeting
Adjusting for Size
• SBBI Deciles
• Duff & Phelps Portfolios • Duff & Phelps Regression Formulas
Page 8October 25, 2013
NACVA Georgia State Chapter Meeting
Adjusting for Size
Page 9October 25, 2013
NACVA Georgia State Chapter Meeting
Adjusting for Size
Page 10October 25, 2013
NACVA Georgia State Chapter Meeting
Adjusting for Size
Which Exhibits to use?
• D&P “A&B Exhibits” apply to equity
• D&P “C Exhibits” apply to invested capital
Most applications are “capital structure” neutral, i.e. MVIC to EBITDA
Page 11October 25, 2013
NACVA Georgia State Chapter Meeting
Adjusting for Size
HURN FCN CRAI NCI Subject
Size Adjustment
Total revenues 677,100,000$ 1,610,000,000$ 261,780,000$ 752,440,000$ 10,000,000$
Constant 0.15060 0.15060 0.15060 0.15060 0.15060
Slope (0.02097) (0.02097) (0.02097) (0.02097) (0.02097)
Size-adjusted ERP based on revenues 9.12% 8.34% 9.99% 9.03% 12.96%
Size Adjustment, Rounded 3.80% 4.60% 3.00% 3.90%
Page 12October 25, 2013
NACVA Georgia State Chapter Meeting
Adjusting for Growth or CSR
Page 13October 25, 2013
NACVA Georgia State Chapter Meeting
Adjusting for Growth
Optional adjustment. Some considerations:
• Can use DCF to compute 5-yr CAGR for Subject
• Blend with long-term growth rate
• Analyst 5-yr growth estimates available for many PGCs
• Blend with long-term growth rate (estimate)
Page 14October 25, 2013
NACVA Georgia State Chapter Meeting
Adjusting for Growth
HURN FCN CRAI NCI Subject
Growth Adjustment
Growth estimate (5 years) 14.37% 13.50% 12.00% 11.67% 6.50%
Long-term growth estimate 5.00% 5.00% 5.00% 5.00% 3.00%
Blended growth rate 6.99% 6.64% 6.74% 6.48% 4.42%
Growth Adjustment 2.60% 2.20% 2.30% 2.10%
Page 15October 25, 2013
NACVA Georgia State Chapter Meeting
Adjusting for CSR
Optional qualitative adjustment. Some good reasons include:
• Extreme customer concentration
• Aging equipment relative to industry
• Unfavorable local demographics
• Poor business mix
• Significantly lower margins
Page 16October 25, 2013
NACVA Georgia State Chapter Meeting
Putting it All Together
Page 17October 25, 2013
NACVA Georgia State Chapter Meeting
ConclusionHURN FCN CRAI NCI
Share price 58.13$ 40.26$ 18.43$ 16.98$
Shares outstanding 22,350,000 39,140,000 10,180,000 49,960,000
Estimated market value of equity 1,299,205,500$ 1,575,776,400$ 187,617,400$ 848,320,800$
Interest bearing debt 181,890,000$ 723,000,000$ 6,840,000$ 128,420,000
Market value of invested capital (MVIC) 1,481,095,500$ 2,298,776,400$ 194,457,400$ 976,740,800$
EBITDA 144,880,000$ 254,340,000$ 22,930,000$ 122,830,000$
Unadjusted MVIC to EBITDA multiple 10.22 9.04 8.48 7.95
EBITDA capitalization rate 9.78% 11.06% 11.79% 12.58%
Add: Size adjustment 3.80% 4.60% 3.00% 3.90%
Add: Growth adjustment 2.60% 2.20% 2.30% 2.10%
Add: Company-specific adjustment 2.00% 2.00% 2.00% 2.00%Adjusted EBITDA capitalization rate 18.18% 19.86% 19.09% 20.58%
Adjusted MVIC to EBITDA multiple 5.50 5.03 5.24 4.86
Subject base year EBITDA 1,000,000$ Average adjusted EBITDA multiple 5.16
Indicated value of invested capital 5,160,000$
Rounded 5,160,000$
Page 18October 25, 2013
NACVA Georgia State Chapter Meeting
Conclusion
Income Approach
• Uses returns of entire stock market as foundation
• Adjust for size• Adjust for growth• Adjust for qualitative
risk factors
Market Approach(
• Uses industry cap rates set by market as foundation
• Adjust for size• Adjust for growth• Adjust for qualitative
risk factors
Two methods of estimating the cost of capital;
The only difference is the foundation.
Page 19October 25, 2013
NACVA Georgia State Chapter Meeting
ConclusionThere are practical differences between Income & Market Approaches:
1. The equity risk premium is calculated based on a different set of empirical data
2. Results can be skewed due to uneven growth rates
3. Market multiples are usually expressed in terms of EBITDA, which is used as a proxy for free cash flow
4. Capex/WC needs as a % of EBITDA should be monitored
5. Getting to “clean” EBITDA figure for PGCs can be tricky
6. Some PGC’s may have advantageous tax situations, increasing EBITDA to FCF conversion
Page 20October 25, 2013
NACVA Georgia State Chapter Meeting
Market Approach Resources
Page 21October 25, 2013
NACVA Georgia State Chapter Meeting
Market Approach ResourcesPGC Method
• Capital IQ• FetchXL and iMetrix• PitchBook• Yahoo! Finance, MarketWatch, Finviz, GuruFocus• Others?
M&A Method• Pratt’s Stats• BizComps• IBA Database• Pitchbook• Industry Specific: Irving Levin, Moss Adams, etc.• Others?
Page 22October 25, 2013
NACVA Georgia State Chapter Meeting
Contact Information
William B. Hamilton, MBA, CVAConsulting Manager(404) 266-9876