Precedent Transactions Discounting Question

If you are taking a multiple from precedent transactions would you still discount the terminal value? Say your precedent transactions median revenue multiple is 5x and the businesses revenue is $100 you have a terminal value of $500. Would you still discount this back since this is what was actually paid for those businesses? Or is this really your enterprise value and the implied sale price would $500 (and you dont need to discount)

 

I think you're only going to discount if you're using it to calculate the terminal value in a DCF.

This would be because the enterprise value is equal to present value of the forecasted cash flow plus the value at sale in the future, which itself would be equal to the value of cash flows from that point on. If you're just taking a revenue multiple at T=0 (now) without valuing cash flows then there shouldn't be any discounting.

I think this is the right way to do it, but hopefully someone more smarter can jump in and explain further.

 
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This makes sense but now I have another question. When you're doing a dcf and run comps to get an ebitda multiple for the terminal value, you have to discount the terminal value. However, when you run comps and get a median or mean ebitda multiple you don't need to discount the enterprise value. I'm just a little confused as to why you don't need to discount the enterprise value in the second example if you would be using the same multiple in both examples. Couldn't you make the case to only want to use the EV from the second example where you place the multiple right on ebitda bc there is no discounting (giving you a higher EV)?

 

In comps, you're using your current ebitda for your multiple calculation. In a DCF, you are you using your ebitda 5 years into the future and calculating terminal value for then. That is why you have to discount the terminal value in the DCF to today.

 

First, on "why don't you discount the EV from a multiple" it's because the multiple is used as a proxy for sale. When doing straight public comps analysis, we're assuming that we're selling our equity and taking a multiple on T=0 cash flow instead of a series of cash flows on the future. The value paid is itself a series of cash flows in the future, and with our semi-efficient markets the multiples represent a landscape of opportunities right now without any arbitrage. In the DCF we assume that the company is just vibin' at t=0 and will spit out money from t=1 to t=5 before we sell it or stop forecasting and guestimate the value of cash flows with the Gordon Growth Method.

As to your second question, there are cases where it makes more sense to let the business develop and sell later. I'd open excel and massage the numbers until it works. It's also worth noting that showing up to a pitch without a DCF, just because you couldn't justify adding one, seems like a recipe for blowing up deals.

 

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