EBITDA Multiple method
Hi guys,
Just got one interrogation this morning :
Imagine 2 companies with an EBITDA of $100,000
But one company bought the walls on its office, of a value of 1 million $
The other is just paying a rent every months
Let's imagine that in their specific industry (they are in the same industry) we apply a multiple of 10 on the EBITDA for estimate the value of a company
Then, the value of both companies is 1 million $ right ? (100,000 x 10)
But in one case the buyer will have the value of the walls (1 million) whereas in the other case the company is just paying the rent
So my question is that the method of the EBITDA multiple doesn't take in account the fact that if yes or not, the company own its own building
In the two cases we pay the same price but in one case we got the 1 million dollars building in the package !
Where is my mistake ??
Thanks a lot
Well most likely, that 1 million in walls is actually a mortgage or some form of debt like bonds sold to raise money to buy the building.
assuming you're not making interest/lease payments on the first company that owns its property, the two should be valued approximately the same.
If the two were identical businesses, the second must be generating slightly more revenue to cover the rent expense (in order to get to the same EBITDA), so you can think of the second company as having slightly larger operations to make it equal in value to the first company that owns the $1mm building.
The rent payment is going to be expensed on the income statement. This means that if you had two companies with same revenue/costs aside from this, the company that's renting is going to have an EBITDA that is lower by the amount of the rent.
The company that owns the building isn't going to have a related expense on the P&L and will thus have a higher EBITDA, but the disadvantage is that you have that much cash locked up in your real estate.
hum yes OK I understand.
Effectively it's make sense
thanks
A common metric for situations like this is EBITDAR. R=rent expense
This adjusts for those that choose to purchase building/store vs those that choose to rent instead
And this, my friends, is just another one of the many reasons why EBITDA is a terrible metric in 99% of all situations.
Envision that both companies actually do have a rent payment. The owner of the building (assuming the value of the building is $1M and that the value of the land under it is not a consideration in any of this) is paying his "rent" as depreciation while the lessor is paying his rent as an actual rent payment to whoever owns the building. In this case, the lessor's earnings power from its actual business is understated relative to the one who owns the building because in EBITDA the owner's "rent" gets added back while the lessor's does not. That's why people use EBITDAR to cut out the lease vs. own aspect in judging peers across the board in certain industries.
More info plz. What are the rent payments?
If you invest 10x your ebitda in properties, I don't even see how you're in the same business. One just became a real estate speculator, how can they have the same multiple?
Basic Question about EBITDA Multiple (Originally Posted: 11/21/2012)
If I know a company was acquired for 8x TTM EBITDA recently, does this mean that the company's equity was purchased for 8x TTM EBITDA, or does the 8x refer to the company's EV, from which I'd need to back out the debt and cash to arrive at the price paid for the equity?
Many thanks!
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