Valuation

Comparable Transaction Analysis

Finding Relevant Transactions

Selection criteria for comparable deals:

1. Industry: Same SIC/NAICS code or sub-industry
2. Size: Target revenue within 0.3x to 3x of subject company
3. Timing: Within last 3-5 years (more recent = more relevant)
4. Geography: Same country/region preferred
5. Business model: Similar revenue type (recurring, project, product)
6. Growth profile: Similar growth trajectory

Common Transaction Multiples

Enterprise Value Calculation

Enterprise Value (EV) = Equity Value
                      + Total Debt (interest-bearing)
                      + Preferred Stock
                      + Minority Interest
                      - Cash and Cash Equivalents

For private deals:

EV = Purchase Price
   + Assumed Debt
   + Earnout (at estimated fair value)
   - Cash Acquired

Applying Multiples

Implied EV = Subject Company Metric x Comparable Multiple

Example:
Subject EBITDA: $2.5M
Comparable median EV/EBITDA: 6.0x
Implied EV = $2.5M x 6.0x = $15.0M

Adjusting Multiples for Deal-Specific Factors

EV/EBITDA Multiple Ranges by Industry

Lower-Middle-Market Benchmarks

Size Premium / Discount

DCF Analysis

Step 1: Project Free Cash Flow (5 years)

Free Cash Flow (FCF) = EBITDA
                     - Taxes (using effective tax rate)
                     - Capital Expenditures
                     - Changes in Working Capital
                     + Depreciation (non-cash, already in EBITDA)

Simplified (common in practice):

Unlevered FCF = EBIT x (1 - Tax Rate) + D&A - Capex - Change in NWC

Step 2: Estimate WACC (Discount Rate)

WACC = (E/V) x Re + (D/V) x Rd x (1 - T)

Where:
E/V = Equity weight in capital structure
D/V = Debt weight in capital structure
Re  = Cost of equity
Rd  = Cost of debt (pre-tax)
T   = Tax rate

Cost of Equity (Build-Up Method for Private Companies)

The CAPM model is often modified for private companies:

Re = Risk-Free Rate
   + Equity Risk Premium (ERP)
   + Size Premium
   + Industry Risk Premium
   + Company-Specific Risk Premium

Step 3: Calculate Terminal Value

Method A: Gordon Growth Model

Terminal Value = Final Year FCF x (1 + g) / (WACC - g)

Where g = long-term sustainable growth rate (typically 2-3%, aligned with GDP growth)

Method B: Exit Multiple

Terminal Value = Final Year EBITDA x Exit Multiple

Where Exit Multiple = based on comparable transactions (often 0.5-1.0x lower than entry multiple)

Use BOTH methods and compare. They should produce similar results.

Step 4: Discount to Present Value

PV of FCFs = Sum of [FCF_t / (1 + WACC)^t] for each projected year
PV of Terminal Value = Terminal Value / (1 + WACC)^n
Enterprise Value = PV of FCFs + PV of Terminal Value

DCF Sanity Checks

• Terminal value should be 50-75% of total enterprise value. If >80%, projections may be too conservative (or terminal assumptions too aggressive).
• Implied exit multiple from terminal value should be reasonable vs. current market multiples.
• IRR at the calculated value should pass the investor's hurdle rate (typically 20-30% for PE).

Sensitivity Analysis

Two-Variable Sensitivity Table

Build a matrix showing how enterprise value changes with two key assumptions:

Example: Discount Rate vs. Terminal Growth Rate

Other common sensitivity pairs:

• Revenue growth rate vs. EBITDA margin
• EBITDA multiple vs. EBITDA level
• Revenue growth vs. exit multiple

Scenario Analysis

Three-Case Framework

Probability-Weighted Value = (Downside x 25%) + (Base x 50%) + (Upside x 25%)

Valuation Football Field

Present all methodologies side by side:

Methodology              Low        Mid        High
─────────────────────────────────────────────────────
Comparable Transactions  $12.0M     $15.0M     $18.0M
EV/EBITDA Multiple       $11.5M     $14.5M     $17.5M
DCF Analysis             $10.0M     $13.5M     $17.0M
─────────────────────────────────────────────────────
Blended Range            $11.0M     $14.3M     $17.5M
Asking Price                        $16.0M

Deriving the Final Recommendation

1. Calculate each methodology's range
2. Weight methodologies based on reliability and relevance
3. Identify the zone of overlap across all methods
4. Consider deal dynamics (competitive process, seller motivation, strategic value)
5. Present recommended bid range (typically 10-15% wide)
6. Compare to asking price and assess reasonableness

From Enterprise Value to Equity Value (Purchase Price)

Enterprise Value
- Net Debt (interest-bearing debt minus unrestricted cash)
- Transaction Expenses (seller's fees paid from proceeds)
- Debt-Like Items (unfunded pension, deferred taxes, etc.)
+ Surplus Assets (excess cash, non-operating assets)
= Equity Value (what the buyer actually pays for ownership)

Working Capital Adjustment (at close):
If actual NWC > peg: buyer pays seller the excess
If actual NWC < peg: seller pays buyer the shortfall

Valuation Red Flags

• Asking price implies multiple >2x higher than comparable transactions
• Valuation requires revenue growth rates never achieved historically
• DCF terminal value >85% of total enterprise value
• Seller's add-backs increase EBITDA by >50%
• No comparable transactions can be found in the industry/size range
• Implied return (IRR) below 15% even in the base case
• Valuation assumes synergies that buyer has not validated

Output Format

When presenting valuation analysis:

1. Methodology Summary — Which methods were used and why, with weights assigned
2. Comparable Transactions — Table of relevant deals with multiples
3. Multiple Analysis — Applied multiples with adjustments explained
4. DCF Summary — Key assumptions, projected FCFs, terminal value, discount rate
5. Sensitivity Tables — Two-variable sensitivity on key assumptions
6. Football Field — Visual summary of all methodologies
7. Recommended Range — Specific dollar range with confidence level
8. Key Assumptions — Explicit list of critical assumptions underlying the valuation
9. Bridge to Equity Value — EV to equity value walkthrough