Fall 2014 issue of Horizons

Figure 1

DISCOUNTED CASH FLOW CALCULATION

For instance, companies in the same industry can still have significantly different levels of debt (and thus different levels of interest expense), different effective tax rates (based on tax jurisdiction), and different levels of asset intensity (and thus different levels of depreciation and/or amortization expense). EBITDA removes all of these potential differences by focusing on earnings before interest, taxes, and depreciation / amortization. Figure 2 on the following page is a chart that shows historical EV/Revenue and EV/ EBITDA multiples for all middle market M&A transactions since 2009. Middle market is defined as businesses with values between $1 million and $1 billion. Asset Approach In using the asset approach, the value of a business is determined by considering the value of the business’ individual assets and liabilities. Under this approach, each component of the business is valued separately. The values are totaled and reduced by outstanding liabilities to determine the net asset value of the company.

when assessing comparability include the industries in which the company operates, its size, capital structure, profitability, growth prospects, and risk factors. When employing the market approach, the ratios commonly used for comparison are Enterprise Value (“EV” or the sum of a company’s equity and net debt) to revenue and EV to EBITDA (earnings before interest, taxes, depreciation, and amortization). The EV/Revenue and EV/EBITDA multiples of recent transactions and publicly traded companies are used to determine what the appropriate multiples for the subject company should be. EV/Revenue multiples are typically used as they are more generally available than EV/EBITDA multiples, particularly for transactions. However, there are usually large ranges in EV/Revenue multiples within an industry, and small changes to the multiple applied to the subject company can cause large changes in the resulting value. In this case, EV/EBITDA multiples are more commonly used and most transactions are referred to in terms of the EV/EBITDA multiple. The main reason that EBTIDA multiples are commonly used is that EBITDA is a measure that removes many of the differences between comparable companies.

In the most commonly used method, the company’s balance sheet is adjusted to

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