Title says it all. Was asked this on an interview.
What is the value of a company with $10M in revenue of which 50% comes from licensing and 50% from services. How do you get to your answer?
I also asked a follow up question, how much is EBITDA? and he said assume 25% even though I think this question really should be answered using multiples?
Thanks fellas
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Could be totally wrong but:
Could it have been more of a thinking question? You can work out EBITDA from that and based on the other info he gave you (or that you could question further), you could possibly ascertain industry and sub-sector focus and back into some sort of reasonable multiple?
Then apply that multiple to your EBITDA.
Thank you for the reply. It took me a second to realize that this isn't a DCF question since we need A LOT more information for a DCF and an actual computer lol. BUT you are correct, we really should be applying an EBITDA multiple and not a revenue multiple.
At least that's what I feel too?
Any other takers? lol
Yeah, for a DCF you need to know more about the company in terms of capital structure and company specifics for example.
Maybe try sum of the parts - split co into 2 (licensing and service), figure out EBITDA for each "segment" (he's probably just telling you to assume 25% margin for both), and then slap the relevant multiple onto each segment, add together.
Makes sense!
What do you mean by "50% from services?"
Your EBITDA question is on the right track. The 50% revenue from services could have a very low contribution margin. As such, the value of the company is really in the licensing agreements. That said, under this scenario, there's significant risk embedded in the company's cash flows, specifically related to licensing renewal risk (the agreements could be terminated).
You would have to understand the agreements better. Can they be terminated upon change of control? If so, what's the likelihood of an acquisition? What's the term on the agreements? Are the agreements exclusive? Etc.
If, on the other hand, the agreements are exclusive and set in stone, then the risk profile of the company is more attractive.
In other words, you need to understand the contribution margin of the two lines of business; the risk profile of the licensing agreement and then determine a multiple based on your assessment of the company's risk, profitability and growth.
From a first glance, I think this commentis goingin the right direction. In the end, the multiple should capture the growth and profitability of the combined enterprise. The interviewer is giving you however (as sole information, and assuming it would be sufficient - at least in principle - to answer the question) the composition of revenue. As @Esuric mentions, most probably services contribute less to the EBITDA, thus may carry a lower multiple. Licencing tends to contribute higher margins, as recurring/running costs associated are generally limited in a run-rate. However, it would still be highly dependent of the elements mentioned by @esuric and the state of the licencing the company is, particularly if it needs to keep on developing their product for licencing appeal (e.g. vs competitors, etc.) it may require high investments (e.g R&D, etc.), which lowers profitability (even if not reflected in EBITDA).
In principle, it is a question to test your reasoning more than anything, as with the two element (10m and 50:50 split) any attempt of a valuation can only be highly directional. In my view...
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