Projecting IS when company is highly acquisitive

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MantisTobogganMD

Orangutan

Most Helpful

Were you given anything on the company’s acquisition strategy? With those changes in revenues, I would assume they’re targeting companies fitting a certain profile, potentially as part of a roll up. If that’s the case, you need to assess what the target company size and targeted acquisitions per year and back into it that way.

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Prospect in IB-M&A

Anonymous

Thanks for your answer.

I wasn’t given any info on future acquisitions. However, the company is owned by a sponsor, trying to exit the company. It indeed seems like the strategy is part of a rollup to increase exit value (?). Would the fact that the sponsor is trying to sell the company impact my forecast?

From what I understood, I should assume no m&a growth for my forecast as I don’t have any info on that.

What do you think?

Market Portfolio Prat Model

Associate 3 in IB - Gen

Anonymous

Assume X aqns per year at Y EV/Sales (or EV/EBITDA then back out acquired revenue assuming Z% margin)

Revenue in year N = organic growth on year N-1 revenue + acquired revenue

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Associate 3 in IB-M&A

Anonymous

For a college class they're not looking for perfection, just a thought process.

Look at the peer set (pick like 4-5 comparable companies) and get an average growth rate for the industry to apply to 2021 revenue. Adjust it a bit as needed - i.e you think revenues will be down in current macro environment, so haircutting for next 2 years, or you think the acquisition of Y company will really supercharge revenues for a bit. typically some granularity until year 3-5 let's say, and then a flat growth rate beyond that for DCF. Bring the flat growth rate down a bit as the company will not grow revenues at a high rate forever, 2-3% is a pretty normal assumption for a terminal growth rate.

Authored by: Certified Investment Banking Professional - 3rd+ Year AssociateCertified Investment Banking Pro

Prospect in IB-M&A

Anonymous

Thanks a lot for you reply.

I was thinking about taking peers growth, however, is it industry standard? Should I not try to find the historical growth rate and use it to forecast my financials?

Prospect in PE - LBOs

Anonymous

You could try to back out organic growth. Then you could either just forecast organic growth, or add acquisitions on top of it. Sometimes companies post organic growth. If they do not, you can usually estimate it. For example:

2018 revenue = $80m

2019 revenue = $100m

2019 growth = 25%

In January 2020, the company acquires a company with $50m in 2019 revenue and historic growth of c. 20% per year

Total 2020 revenue = $185m

Organic 2020 revenue = $100m * 1,25 = $125m

Acquired 2020 revenue = $50m * 1,2 = $60m

Total 2020 growth = 85%

Organic 2020 growth = 25%

Obviously, this method will not give you an exact number, but it will give you a rough estimate. You can then compare this estimate to the growth of competitors in the same industry and the market growth to see if it makes sense. The easiest thing would be to choose a company with fewer acquisitions though as in reality, it will be much more difficult than my simplified example.

Prospect in IB-M&A

Anonymous

Thanks a lot for your answer. This is actually what I was trying to do. However, I’m unsure on how to proceed as my company has also been acquiring a lot (to follow your example) in 2019. Thus, the growth from 2019 to 2020 isn’t all organic and I don’t think I can use it to forecast 2021.

Should I still use 2019-2020 growth?

Should I, in 2019, also split the organic vs m&a growth? And use this 2019-20 growth to forecast 2021? However, this seems weird as past years m&a growth should be assumed to be organic the following year, right?

Thanks again for taking the time to reply!

Prospect in PE - LBOs

Anonymous

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