Hi All,
I am estimating the enterprise value of a private company using the market approach and more specifically the EV/Ebitda and EV/Sales multiples(not transaction). My first question is; do i have to adjust the enterprise value for Discount for lack of Marketability since i am using multiples of traded companies? or is this discount only applicable when i am calculating the equity value?
also the subject company has significant creditors as at the valuation date and generally its working capital is not normalised. Do i have to make an adjustment to the EV to account for the abnormality?
Thank you
You still would apply a Discount for Marketability (DLOM) because the equity value is inherently captured within the calculated enterprise value. This discount could be as small as 10% (maybe for mega-firms like IKEA or Cargill) or as big as 50% (for, let’s say, a 5-man accounting practice). It should be acknowledged that these discounts often have little reasoning behind them and are often done just to make the numbers “work”. In terms of your second question, I didn’t quite understand what you’re saying, but yes, in theory, you would adjust the purchase price down or up (or have the owner retain the working capital) if it is at an abnormal level. This, however, is a very broad response and may not apply to your specific situation.
Seen the same approach as TREBITDA has laid out where the median EV/EBITDA for a set of comps is discounted (in the situation I saw it was because the listed comps were much bigger).
WC abnormalities would usually form part of the completion accounts mechanics in a PE transaction.
Thanks guys i confirm that you have answered my questions.
i will use the DCF method to value the company as well. Do you think i should adjust the WACC to account for the abnormal level of creditors?
I know the questions were more technical, but I have another one. I work in FoF, with exposure to co-investments.
For my own knowledge, apart from the valuation, if you spot a micro cap, and you had the capital yourself (as a private investor), how would you approach the company?
How would you proceed as a private investors to complete the DD without all the resources a normal Fund has?
(I am familiar with Seedrs, Crowdcube, Crunchbase... but the micro caps I am looking are not normally there).
Appreciate your experiences and suggestions.
Literally just create a discount rate based off the risk you estimate the company is exposed to. You can calculate the needed multiples based of cca but it’s a comparable at the end of the day
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