How to calculate EV for LBO of a private company?
Would you use DCF and comps to find enterprise value and then back out net debt to get equity value? Also, what are the major differences in the lbo model for public and private companies?
One way that I've done is target an IRR (e.g., 20-30%) and then backsolve for the purchase price that would result in the targeted IRR.
This is the way to do it IMO. However, OP, if you have an idea of multiples, just plug in the range to get EV and use IRR to confirm.
I think one different between valuing public vs private companies is management.
In a private company, they can really just rest on their laurels. I know many business owners that really dont want to get too large. I think this allows for more room for growth. Private companies can generate some great returns.
W/ public companies, that board + wall street analysts will push for certain growth, so I think they flesh out the more complacent managers.
I don't think that is a good generalization. In a private company, it's more likely management owns a decent chunk of the business and is more incentivized to maximize value to the owners over the sheer size of the business. The level of activity and striving for "growth" may be less at a private company, but growth doesn't necessarily mean shareholder value. The fact that managers of public companies are evaluated on a quarterly basis incentivizes short-term thinking and may make sweeping changes in strategy difficult to implement.
As for the valuation, I agree that backing out a purchase price based on an appropriate return threshold and building in the intended capital structure is the best method.
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