If I want to buy a shop

Hi

I want to buy a shop :

EBITDA of the shop = 100,000€
Debt of the shop : 1,000,000€
Cash = 0

If we take a Multiple of 15 : 15 x EBITDA = 1,500,000€. This is the enterprise value right ?

But then, what do I have to pay to buy the shop?

1,500,000 - 1,000,000 = 500,000€ right ?

Thanks

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Comments (9)

Mar 19, 2014 - 1:03pm

OK

But let's say that a multiple of 15 is too much

let's say we should use only 9, in comparison of the other deals of the same kind of shop

we got an enterprise value of 900,000€ then

But the shop have 1 million in debt

So it is mean that I lose 100,000€ in this operation ?

Mar 19, 2014 - 1:19pm

Sorry for double post.

I may look stupid but the formula of enterprise value is :

Enterprise value =
common equity at market value (this line item is also known as "market cap")
+ debt at market value (here debt refers to interest-bearing liabilities, both long-term and short-term)
+ minority interest at market value, if any
+ preferred equity at market value
+ unfunded pension liabilities and other debt-deemed provisions
- cash and cash equivalents
- "extra assets", assets not required to run the business
- investments in associated companies at market value, if any

In my simple example we have no cash but 1 million in debt

With a multiple of 9 and an EBITDA of 100,000€, we got an enterprise value of 900,000€

But it is inferior at 1 million, is it mean that this enterprise value is false ? Enterprise value has to be at least equal to the amount of debt ?

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Mar 19, 2014 - 2:24pm

Then, is it OK to find a value of 900,000€ (with the EBITDA Multiple) which is inferior at the amount of debt (1,000,000€) ?

EDIT: with the utilisation of the EBITDA Multiple method we find an asset value, but this is not the same that the definition of the enterprise value actually right ?

Thanks

Mar 19, 2014 - 4:20pm

It's not your debt - it's the debt of the prior owner. Typically the transaction will be cash-free debt-free, so he has to pay off the 1 million, regardless of the purchase price. If the price is 1.5 million, he'll pay it off and have 0.5 left over. If the price is 0.9, he'll still be on the hook for 1 million. If the prior owner's equity is worth less than 0 (EV

Technically, if you did assume the debt and the purchase price was 0.9, the prior owner would be paying you 0.1 in cash in exchange for you removing his 1 million liability (debt).

Mar 19, 2014 - 4:51pm

Think of it as - You Can either:
1) purchase the company at the valuation and assume the debt
2) pay the entire amount (in other words pay off the debt, or refinance)

Don't listen to anyone, everybody is scared.
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