A decade ago, Richard Jackim and Peter Christman wrote a book entitled The $10 Trillion Opportunity. The second edition had the subtitle of “Designing Exit Strategies for Middle Market Business Owners.” While the book did provide a guide for financial advisers working with middle market business owners, I don’t recall that it provided a basis for […]
On Friday, I read a headline that said that, based on a recent round of financing in which $1 billion was raised, the equity capitalization of Uber is about $51 billion. I thought that was staggering, since I knew that Uber was only a few years old and, well, that’s a lotta value. Its investors included Microsoft and the Times Internet Group of India per the Wall Street Journal.
A good friend and nationally known speaker, Don Hutson, invited me to join the National Speakers Association way back in 1997. NSA conferences are just about the only non-appraisal related meetings I attend. Last week, I attended the 2015 annual convention of NSA, where the theme was Influence.
I attend the NSA conferences to learn more about the art and craft of speaking, as well as to hear about new trends in social media and more. However, this year, I was pleased to find the session beneficial both for me personally and professionally, but also, perhaps, for you as well in my top 10 takeaways.
A key assumption necessary to develop capitalization rates and valuation multiples for capitalizing EBITDA is that of the EBITDA Depreciation Factor. We begin by examining the relationship between Earnings Before Interest and Taxes (EBIT) and Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA). We also test the general discussion with some market evidence.
Special dividends, to the extent that your company has excess assets, can enhance personal liquidity and diversification. They can help increase ongoing shareholder returns. I have always been against retaining significant excess assets on company balance sheets because of their negative effect on shareholder returns and their adverse psychological impact. It is too easy for management to get “comfortable” with a bloated balance sheet. We explore the decision of special dividends and their effects through a short anecdote.
With the backdrop of normalizing adjustments related to non-recurring and discretionary items, we continue our discussion on normalizing adjustments. There are other types of normalizing adjustments that occur because of the relationship between the balance sheet and the income statement, and the process of normalizing a company’s balance sheet may give rise to additional normalizing adjustment for the income statement. In this post we address additional questions and issues about normalizing adjustments and then discuss balance sheet adjustments.
In this post, we talk about normalizing adjustments to the income statements of private companies. However, we cannot talk about normalizing adjustments for the income statement outside the context of adjustments to the balance sheet. As we will see, there are many things that can happen in a given year that might distort the pattern of earnings from the viewpoint of valuation or from the perspective of market participants. The purpose of normalizing adjustments is to show what earnings would be on a, well, normal basis. We discuss non-recurring items both those that will decrease normalized earnings as well as those that will increase earnings as well as discretionary items.
Technically, there are three valuation approaches, the income approach, the market approach, and the asset approach. Within approaches, there are valuation methods. For example, the single period income capitalization method is a method within the income approach. Finally, there are techniques within methods. The single period income capitalization of net income or net cash flow is one such technique. This post introduces a single period income capitalization technique to capitalize EBITDA. It should be of interest to business owners, business appraisers and market participants.
Considering the foundation we have built in the last few posts, we can now, using the total capital version of the Gordon Model, build capitalization rates and multiples for EBIT and EBITDA. We discuss the various assumptions or calculations, which are found on the numbered rows in our example table.
Many market participants and business appraisers refer to EBITDA as one measure of gross cash flow. Some business owners think about the value of their businesses in terms of rule of thumb multiples of EBITDA, say 4x to 6x, or 5x to 7x, or whatever, depending on the industry. However, Warren Buffet warns against “trumpeting EBITDA” as a “pernicious practice.” In light of both sides, we consider whether it can valuable to look at EBITDA in the context of two different public companies: Exxon and Apple. We introduce what may be a new concept in the EBITDA Depreciation Factor.
