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Real Relative Valuations

Financial and spending decisions are made on a relative basis, regardless of whether those decisions are around buying a car, booking a vacation, ordering at a restaurant, or acquiring a business.

For every valuation, Valu8er relatively benchmarks a subject business’ implicit EBITDA (and/or sales multiple) to comparables based on the 15 Pillars of Valuation.

The DCF and the Build-Up Maintainable Cash Flow methodologies are useful finance tools that are great for scenario analysis and are easy to build as models in Excel. However, the reality is that private businesses are most often valued based on multiples of EBITDA (and as multiples of sales when the company is a growth company that can be scaled). While public companies are valued based on forecasts and projections, private businesses are valued based on their trailing twelve month EBITDA (‘TTM EBITDA’). Industry experts stress the importance of EBITDA as follows:

Forbes:

"A…majority of all private company transactions are valued on the basis of EBITDA…buyers are going to review EBITDA as they value your business to make an offer."

Deloitte:

"An acquirer will focus on EBITDA as a benchmark for profitability for the business and will typically base the price on a multiple of this metric."

PwC:

"Every sustainable dollar added to the EBITDA figure is worth 'x' times EBITDA when you come to sell."

In the context of relative valuation for business valuation, we note the following guidance from Valuations Guru Aswath Damodoran:

1) “In relative valuation, the objective is to value assets, based upon how similar assets are currently priced in the market.”

2) “Most equity research reports and many acquisition valuations are based on a multiple such as…the value to EBITDA multiple and a group of comparable firms.”

3) “…a valuation based upon a multiple and comparable firm can be completed with far fewer assumptions…than a discounted cash flow valuation.”

4) “…a relative valuation is simpler to understand and easier to present to clients…than a discounted cash flow valuation.”

5) “…a relative valuation is much more likely to reflect the current mood of the market…”

6) “…relative valuations will generally yield values that are closer to the market price than discount cash flow valuations.”

7) “Most asset valuations are relative. Most equity valuations on Wall Street are relative valuations.”

8) “More than 50% of all acquisition valuations are based upon multiples”

9) “…multiples are not only common but are often the basis for final valuation judgments.”

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