Cash Flow vs EBITDA vs Discretionary Earnings
April 14, 2021
by an investor from Carnegie Mellon University - Tepper School of Business in Raleigh, NC, USA
Under the Valuations Section in this website there are multiples per industry and there are different kinds of multiples such as Revenue, Gross Profit, EBITDA, EBIT and Discretionary Earnings. however when looking at some teasers of some deals, the agent lists Cash Flow and then they multiply it by a multiplier to come up with the valuation. So my question is, what does Cash Flow equate to in the context of BVR industry averages; is it EBITDA or Discretionary Earnings?
from Boise State University in 800 W Main St, Boise, ID 83702, USA
The databases (Bizcomps, DealStats, Peercomps,) use SDE (seller's discretionary earnings) which is normalized/adjusted EBITDA plus adjusted compensation for one working owner. Bizcomps reports only asset sales (not stock sales). However, Bizcomps database does not include inventory in the sales price. So if your subject company has inventory, then a normalized inventory amount must be added to value after applying the multiple.
The DealStats database includes both asset and stock sales so you much select which type you are analyzing (don't mix them because the transaction structure matters). DealStats assumes that inventory, if any, is included in the sales price (so don't add inventory). DealStats defines Discretionary Earnings as normalized EBITDA plus adjusted owner compensation.
The ValuSource database (used to be called the IBA database) does not add back depreciation or amortization to the earnings. I realize this sounds confusing and it can be. I suggest reading the FAQ's and resources that each database provides regarding how the data is reported and how to use it to make sure you are applying apples to apples.
In my opinion, as a business appraiser and business broker, determining the multiple in a valuation requires research and doing regression analysis to determine the "right" multiple for a specific company. There is no one size fits all multiple.. And, sometimes, the revenue multiple is the "best" choice depending upon the situation.
I realize this may be confusing. Let me know and I'm happy to have a discussion.
from Portland State University in Portland, OR, USA
The DealStats database does contain stock and asset sale transactions (though ~70%+ are asset sales). You can separate those transactions and apply the multiples separately, you can convert the stock sales prices to an asset value equivalent and recalculate the multiples (BIZCOMPS does this for contributed stock sale deals), or you can restate the selling prices for your selected comparable companies using the provided purchase price allocations to include a common bundle of assets (like fixed assets and intangibles) and recalculatate the multiples. You can learn more in the Companion Guide (https://www.bvresources.com/docs/default-source/free-downloads/dealstats-companion-guide.pdf?sfvrsn=dd1cfb2_2) and on the FAQ page (https://www.bvresources.com/products/faqs/dealstats).