For those of you in corporate development or private equity, you obviously like to see good-looking forward projections when evaluating a company. But, I am curious as to how frequently you would ever give an offer based on some forward multiple. If you have ever done so, how would you quantify those occurrences to the total number of deals you've been on?
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From (my) PE perspective:
Forecasts can never take the place of historical data or struggles and at the end of the day, there has to be an underwritable business. When doing my own modeling, I use forecasts as a rough guide (coupled with my own observations, predictions), depending on the most important part of getting the forecasts: talking through them with management / bankers. I would note, that I spend most of my time in mature businesses in mature industries - so most of the companies I look at aren't highly growth dependent regardless.
Although my team is quite risk averse, and thus paying forward multiple is unlikely to be honest, one situation in which I could see this coming to play is the following: If the business has 5 mature locations (with proven ramp, etc) and has 2 locations that have just opened and haven't reached maturity, then perhaps you might be paying off of growth as well as historical figures. Note that earnouts are also quite common in the space as well.
Forecasts that are wildly optimistic are also just really funny sometimes, and man have I seen some wild shit.
Thanks for the input. I would imagine you're more likely to see the hockey stick growth projections rather than something conservative on the majority of deals that pass your desk
Any other thoughts?
I work in an industry that is coming out of the bottom of a cycle and pretty much everyone in the industry is using 2018 multiples right now. There are some exceptions but not many. We also see a lot of earlier stage industry-related tech companies so we often value them off a forward multiple, even in a better economy.
I've seen one forecast that we've used as our base case. Most of the time the seller's forecast is pure fantasy.
Thanks for the input. Yeah, I think I mean excluding early-stage companies. May I ask what industry you work in?
O&G, mainly oilfield services (OFS)
I don't think early stage uses an forecasts, I think they look more at the industry.
I don't understand the question. Valuation is a forward looking process.
He is saying Valuation in PE/VC is tough?
No
I'm just asking what is more common from your experience - if you're using a multiple, for example, would you apply it to maybe a ttm figure or a NTM figure?
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