Private Deal Update Q3 2016
When valuing a business selection of the correct multiplier is critical to achieving an accurate well founded and justifiable valuation. Some of the more commonly used acronyms for valuation multipliers include;
Sellers Discretionary Earnings (SDE);
Gross Profit Margins;
All multipliers are useful in different situations although it is beyond the scope of this article to detail there best uses. Often when selecting a multiple it is useful to evaluate comparable transactions across several types of multipliers. For example, if i was determining a suitable multiplier for a manufacturing business i would compare other business sale transactions on the bases of the actual sales price divided by both EBIT and EBITDA as then i would begin to understand the impact of depreciation and amortisation on the valuation. Given that most manufacturing businesses are capital intensive it is arguable that the an EBIT approach should be used as this form of multiplier is reflective of the earnings of the business after the cost of depreciation.
Pratts Stats recently released its private deal update for Q3 2016 which provides some useful analysis of multiple trends. The graphic below indicates the median cost of invested capital (acquisition price) divided by EBITDA on an industry by industry basis.
From a valuations perspective it is clear that the wholesale and manufacturing industries attract the highest valuation multipliers (5.11 and 4.55 respectively) however it is likely that this is reflective of the fact that both industries would be expected to have significant depreciation expense. Therefore on an EBIT basis the valuation multiple would higher.