I have used this blog (and my former blogs) as a place to develop new materials. In late 2014, I began a series of posts to develop a means of building multiples of EBITDA using what I call the Adjusted Capital Asset Pricing Model. As with all new material, it took longer to develop than I at first expected. After I had what I thought was a workable model, I held back from writing any more and spent time addressing a number of groups of business appraisers. If the method could pass muster with this form of peer review, then, perhaps I could write more formally about it.
Eventually, I was encouraged to submit an article to the Business Valuation Review. The BVR is a double-blind peer review journal, so I looked forward to the additional review from the readers, who provided excellent and thoughtful comments. Addressing the comments strengthened the article, which was published in the Fall 2016 issue of Business Valuation Review. Readers of this blog can obtain convenient access to the article, which is titled “EBITDA Single-Period Income Capitalization for Business Valuation,” (with permission).
I hope you enjoy the article and find it helpful. In summary, the article begins with a traditional build-up of the weighted average cost of capital (WACC) using the same tools and assumptions that appraisers and market participants employ every day. Debt-free net income/cash flow capitalization rates are converted to pre-tax cap rates (and multiples), or EBIT multiples. The article then uses the relationship between EBITDA and EBIT to convert EBIT multiples into EBITDA multiples.
As always, I look forward to your comments.
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