Hi All,
I have a question regarding adjustments in comparable company analysis. I know you typically make adjustments to account for fully diluted shares and non recurrent events. However, I was reading a fairness of opinion report on a valuation and they adjusted for margin, risk and growth. My question is how do you make these adjustments? This is an exert from the report:
"The comparable company sales multiples were adjusted for margin growth and risk differences, while the EBITDA multiples were adjusted for growth and risk differences.
The growth adjustment was made by comparing the present value of future expected cash flows based upon differing discount rates of the comparable companies and the company"
The adjusted multiples are significantly different than the raw data multiples. SB for anyone that can explain how these adjustments are done.
Thanks.
@takenotes08" I'll take a stab at this (not an expert but let me try). Let's take an O&G equipment manufacturer. Sales for a company that fits this industry sector would be affected by rig counts, oil prices, macro-events such as wars in the the Middle East, etc.
I would assume given the example above they would estimate sales of XYZ @ WTI Price (oil price) of 123 and as the price of oil increases or decreases they would sequentially adjust the sales in the same direction.
Example, if Company A sales at $80 crude equaled $250M and at $70 crude equaled $200M I see that there is a decrease in sales of -20%. If I believe oil will continue to decline I would reduce sales by this percentage to be able to then adjust for the effects of lower or higher oil prices to determine future sales.
This isn't the greatest example in the world so read pg. 26 of this (http://www.anchin.com/Upload/News/719301-022015_LFVS_ValuationStrategie…). It provides a much more detailed response.
Can you provide more info? Which industry are we looking at? What risks are you observing?
This article actually demonstrates the concept very well. I found it to be very helpful. Thanks!
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