In arriving at a bid price, buyers typically use two methods. The most often mentioned is the EBITDA multiple, which is easy to calculate and allows quick benchmarking against comparable transactions. But reliance on multiples has drawbacks including over-simplification, failure to account for company-specific factors, and buyer misuse as a negotiating tool.
Alternatively, sophisticated buyers primarily use the Discounted Cash Flow (DCF) method to develop their bids. To support higher pricing with these bidders, sellers should focus on two elements of DCF analysis:
- Quality historical information: Buyers use past performance as a starting point when creating their DCF models and will discount projected cash flows if they detect any weakness in recent years’ data. In this respect, Audited or Reviewed financial statements are worth their weight in gold in supporting sellers’ projections and higher valuations.
- Defendable projections: Confidential Information Memorandums with “hockey sticks” in the projections section immediately cause buyers to become skeptical and reduce expected future cash flows in their modeling. Sellers must provide forecasts based on solid logic and back them up with accurate data and analysis.
We work with our clients to make sure, to the extent possible, both their projections and accounting information inspire confidence. By doing so, sellers maximize their DCF-based valuations which can then be “sanity checked” against market-based EBITDA multiple pricing.
Have a great day everyone.
Managing Director, Aerospace