Hi everyone
I went to a private equity interview a few weeks ago with a top PE fund.
I did not get the job which I think was because i fucked up a few questions on valuation. So in order to be prepared for the next interview in the future I would like to have your help. Note I have a non-banker / non-finance background so please don't rip my nuts off for messing up the interview.
The question I received:
Question 1: EBITDA multiple (enterprisevalue divided by EBITDA) is one of the most common way to value a company. Please explain when it is relevant to use the following multiples.
A. EBITDA multiple (enterprise value divided by EBITDA) B: EBITA multiple (enterprise value divided by EBITDA minus depreciation) C: EBIT multuple (enterprise value divided by EBIT) D: Name other multiples that could be relevant to use and when
Question 2: Imagine you own a company that operates vending machines. The company does not own the vending machines but lease them. The vending machines are placed all kinds of places e.g. hospitals, train stations, subways etc. The vending machines sells candy, soda etc.
A: How would you value this company if you use multiple valuation? B: Would it be relevant to use an EBITDA multiple with maintenance costs subtracted for valuation? if yes, please elaborate why it would be relevant?
Hope you have some good answers!
I will give it a try.
Q1: A. EV/EBITDA - Companies with significant fixed assets e.g. both PPE and intangible assets (most common method) B. EV/EBITA - Companies with significant intangible assets + no significant PPE C. EV/EBIT - Companies with no significant PPE and intangible assets D. EV/Sales - New Company or Loss Making Company P/E - For convenience
Q2: A Since the company does not own the machines, I would say EV/EBIT based on the information provided. If the company has other PPE such as vehicles to top up the machines, I would say EV/EBITDA.
B I would say that EV / (EBITDA - Maintenence cost) is generally not relevant since the company does not own the vending machines. On the other hand, I think it would be relevant if the operating lease is capitalized e.g. the company lease the machines for a long time (Not sure about this).
+1.
I mean these questions are kind of stupid, right? Because if a company doesn't have much in fixed assets or intangibles then using EV/EBITDA is about the same thing as using EV/EBIT, you're just adding back a nominal amount for DA. So aside from EV/Revenue or EV/Gross Profit, which are special cases, you can just use EV/EBITDA pretty much the entire time.
As for 2B, that would depend on the terms of the contract. If you're leasing but responsible for certain maintenance/upkeep expenses, then you're going to have a certain level of maintenance expense, however (hopefully) this amount is nominal.
You are right that in the end, the multiple is usually EV/EBITDA or EV/Revenue.
I would also add an FCF multiple, since this is a PE interview.
Hey! Thanks or the answer!
Q2 is about using EBITDAR when comping the company against companies who own their assets and don't pay rent. So if you rent, your EBITDA those that own => inflated multiples for those that rent.
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