I'm studying up questions in preparing for this coming recruiting season. One question that I had was why do multiples used forecasts instead of historical #s? I read somewhere that it's more reliable but how exactly? Thanks!
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1) Forecasted #s don't include any one-time charges that would distort the underlying business (or profitability thereof)
2) When you buy a business, either as a minority (public equities) or control (PE, etc.), you're interested in valuing the future cash flows / prospects of the business, not the past - using forecasted #s enables you to capture some of the growth of the future
Ahh #2 makes a lot of sense. As far as #1, would you not adjust your EBITDA figure to strip out one off transactions?
For these companies, won't forecast #s be inaccurate since they probably wouldn't sustain that level of growth beyond a X number of years? Or would this be an instance where you rely more on comparable comps and precedent transactions?
Sorry for all the questions. Conceptually I'm starting to understand valuations (didn't take finance in college), but the application of it is still a bit hazy.
along similar lines to point #2 above: particularly with high growth companies (ie many in the tech sector), the companies are being sold at a stage in their development such that their last 5 years look absolutely nothing like their next 5 years. the value of these companies lies in their rapidly accelerating growth. therefore, using historical numbers would dramatically undervalue the company.
now the trick is convincing buyers that your projections aren't a load of crap...
Double post....
Well I was being a bit tongue-in-cheek with my last sentence; in general, buyers will believe your future growth projections if you're able to tell a compelling story (granted they'll probably discount them a bit).
LOL! No I got you were saying with the last sentence, and it does makes sense your valuation is as reliable as how well you can convince a buyer. I just meant conceptually, isn't forward multiples just as unreliable as backwards multiples for high growth companies?
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