Buy, Hold or Sell (Part 2): Specific Valuation Techniques

by Martin Stein · Blackford Capital · August 1, 2007 - page(s): 12-29

This article is the second of a two-part series about buy, hold, and sell decisions. The first article in the series provided several frameworks to help shareholders evaluate buy, hold, and sell decisions. This article focuses on case studies of businesses — tailored to industry-specific stories — and provides detailed analyses of how businesses might be valued using a simple multiple of earnings calculation. The authors of this article are two private equity executives who have bought and sold multiple companies within the compatible imaging supplies industry, and their perspective is informed by conversations with approximately 100 potential sellers and communications with more than 1,000 potential buyers.

Companies are valued using a variety of different techniques including, but not limited to: discounted cash flow analyses, multiples, comparables, asset values, and liquidation values. One of the simplest and most common methods to value a business is using a multiple of earnings, or EBITDA.

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. EBITDA is used as a regular determinant for earnings because it does not account for interest, which is affected by the capital structure; taxes which vary substantially depending on the tax bracket, state, and other factors; and depreciation and amortization, which are affected by capital expenditures and assets. Although it has its limitations, EBITDA is perceived to be the purest form of cash flow on which to base the ultimate value of a business.

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Related Articles: 1:Shift Happens 01/01/2008; 2:Yesterday's Emerging Trends Have Arrived 01/01/2008; 3:Outsourcing in 2008 12/01/2007; 4:Buy, Hold or Sell: Maximizing the Value of Your Business 08/01/2007

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Buy, Hold or Sell (Part 2): Specific Valuation Techniques

by Martin Stein · Blackford Capital · August 1, 2007 - page(s): 12-29