EBITDA Valuations
If you had a company that was $20m revenue / $10m EBITDA growing 30% vs a company that was $50m / $10m and flat, what EBITDA multiple would you pay for each company? I know there's a lot of additional variables that goes into the evaluation, but I guess I'm just trying to think through whether people would give more value to growth or scale assuming equal levels of profitability?
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Most definitely a higher multiple for the company growing at 30%. Higher growth and higher EBITDA margin.
If you’re assuming all things equal besides the two p&l’s, I’d obviously place a higher valuation on the company that’s growing faster and has better margins.
I don’t think you’re outlining your intended scenario correctly
Most people will give a higher multiple for growth.
If you have a company that's got EBITDA of $10M, next year you're anticipating it to be around $13M, if you pay a 5x multiple, your implied forward multiple next year will be lower.
However, if you pay 5x for a company that's at $10M and has no growth (assuming EBITDA is $10M next year), the implied forward multiple is still 5x.
I don’t think you should look at this through the lense of multiples given the growth profile. When you have such different businesses, applying a set of precedent transactions / trading multiples isn’t as relevant. Unless of course you can get transaction comps of businesses growing at the same rate. Instead, I would focus much more on a DCF or the valuation implied by an LBO.
agreed. otherwise you’re just pricing the company as opposed to valuing it.
without context and all else being equal, the higher growth company deserves a higher multiple.
I agree with other posters that higher growth company should command a higher multiple. When pitching an investment, bankers often present a chart with EV/EBITDA multiple on the Y axis and EBITDA growth on the X axis for all companies in the comps universe. Then they plot the "best fit line" (linear regression) that helps you estimate what EV/EBITDA your business deserves given its EBITDA growth profile.
There is also a sister chart with P/E multiple vs earnings growth.
The reason that you pay a higher multiple for the growing company is that over time it returns more cash. The only way you should think about this is return of cash...using EBITDA as a proxy for cashflow. You can calculate the breakeven multiple based on ROIC assuming those growth rates. Obviously that is just a proxy, but an efficient market should price these at parity if truly there are zero other business considerations.
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