VALUATION OF COMPANIES THROUGH MULTIPLES, A COMPARATIVE ANALYSIS

During the process of Valuation of a company, it is common to entrepreneurs, executives and Advisors involved in the study, use the term Company Value or Enterprise Value. In a simplified way, Enterprise Value represents the total value of the business, before your assets (cash) are added and your debts are deducted.

O Enterprise Value It is usually used as the main indicator during the valuation of a company, since Net Debt (Gross Debt - Availability) changes at all times, and in a possible transaction, it will be determined at the time of the conclusion of the deal. There are different methodologies used to ascertain the Enterprise Value of a company. The most common, guided by studies of Experts such as Philip Fisher and Aswath Damodaran, assume that the value of an asset (in this case the company) is determined by the potential to generate future wealth (cash) for its partners and shareholders. They are methodologies that assess the Intrinsic Value of the asset. On the other hand, there are also Relative Valuations or Multiple Valuation, which are methodologies that assume that the value of an asset must be close to other similar ones available in the market. Multiple Valuation is temporal, often standardized, and assesses the rationale between two financial or operational indicators for a certain period. A simple example of Relative Valuation is the price per m² of the property. After a family finds an interesting property, based on important issues such as location, finish, number of rooms available, etc., it is common for them to search the neighborhood for the price per m² of similar or neighboring apartments, as a way of confirming that the price being demanded by the seller is fair, if it makes sense. The apartments can be comparable not only by financial aspects (price) or size (m²), but also by other factors such as the age of the building, finish, etc. Example:

In the valuation of companies, the most common multiples used during Relative Evaluations or Multiple Evaluations are:

• EV/EBITDA: commonly used during Mergers and Acquisitions processes, this multiple is based on the EBITDA* of the last year, or the last twelve months, of the company to be evaluated. EBITDA is a management indicator that makes it possible to measure, in a simplified way, a company's operating cash generation. A 5.5x EV/EBITDA multiple means, for example, that the company is worth the equivalent of five and a half years of operating cash generation, considering past results. Because it is a temporal assessment, where only a specific period of the company's results is considered, the value found is no guarantee that the same company will present similar results in the future.

• EV/SALES: this multiple is based on the company's Net Revenue, also from the last year, or the last twelve months. When a company has negative EBITDA, this multiple cannot be used. In these cases, therefore, it may be advisable to use EV/SALES. This multiple is commonly used to evaluate new companies, in a phase of accelerated sales growth, where operating costs generally exceed revenues.

• EV/ARR: this multiple uses ARR as a base (Annual Recurring Revenue or Annual Recurring Revenue). Commonly used to evaluate technology companies that market their products in the SaaS model (Software as a Service) and which are growing rapidly. A 4.0x EV/ARR multiple means, for example, that the company is worth the equivalent of four years of annual recurring revenue. For this multiple, the billing derived from other services, other than recurring monthly fees, such as a consulting or implementation project, are not included in the calculation.

There are other multiples that can be considered when evaluating a company. Generally, each sector or niche market has one or two indicators that are used by entrepreneurs, who are used to the specific metrics and nuances of their business, during the evaluation of a company, as a complement to other indicators and methodologies. In the education sector, for example, it is very common to evaluate an institution by the number of students enrolled. In the transportation sector, on the other hand, the number of vehicles is used. Although commonly used, especially during Mergers and Acquisitions processes, Multiple Valuation is just one of the methodologies that should be used in a Valuation. It is highly recommended as a complementary way to other valuation methodologies, such as Discounted Cash Flow. Using the example of the price per m² of the property again, a family does not purchase a property just because the price of the m² is low, it does so for several other aspects, including intangible ones. However, it uses this analysis as a way to provide some comfort when negotiating with the potential seller, since there will always be other assets, even if not identical, available on the market for comparison. *EBITDA: The acronym corresponds to”Earnings Before Interests, Taxes, Depreciation and Amortization“, that is, earnings before interest, taxes, depreciation, and amortization. The indicator represents the company's operating cash generation without taking into account financial and tax effects. ARTICLE WRITTEN BY HENRIQUE PORTO - PARTNER OF FC PARTNERSGo to our site: http://www.fcpartners.com.br