Enterprise Value using EV/EBITDA
I'm struggling mightily with this concept of, and why cash is subtracted specifically from a multiples standpoint.
Let's say I have a business that has the following characteristics:
EBITDA Multiple: 5
Therefore,: -$5 assuming zero debt.
First off, I do understand from a buyer's standpoint, that the enterprise value represents the effective price they are paying to acquire a business. If they were able to purchase all of the equity of the company, they would pay $15 and basically take over a company with $20 in cash, which makes sense as to why enterprise value is -$5.
What I fail to understand is and can't wrap my head around is, what would be the actual sale price in the above hypothetical?
In a perfectly efficient world, why would any seller accept anything that is less than the equity value ($15) PLUS the excess cash they have in the corp ($20) for a total of $35?
Interestingly, I was working on an acquisition where this actually occurred. The vendors valued their company using aADDED all excess cash (instead of subtracting) to the purchase price...