Terminal Value in SMEs: Testing the Multiple EV/EBITDA Approach

[EN] This study focuses on answering whether EV/EBITDA multiple of public companies in the food industry can be useful to obtain the Terminal Value (TV) in the valuation of unlisted small and medium-sized food companies. A case study into Spanish unlisted agribusinesses is designed for several samples and accounting years from 2010 to 2013. By means of a discounted cash flow (DCF) model combined with bootstrap techniques, the TV/EBITDA empirical distribution of the unlisted multiples is obtained for two different scenarios of free cash flow (FCF) growth, and then compared with the EV/EBITDA of the listed companies in the same industry. The results show that the stock market EV/EBITDA multiple may be used to determine the TV in the valuation process of unlisted small and medium-sized food companies that consistently obtain positive cash flows.Vidal Garcia, R.; Ribal, J. (2019). Terminal Value in SMEs: Testing the Multiple EV/EBITDA Approach. Journal of Business Valuation and Economic Loss Analysis (Online). 14(1):1-11. https://doi.org/10.1515/jbvela-2018-0012S111141Petersen, C., Plenborg, T., & Scholer, F. (2006). Issues in Valuation of Privately Held Firms. The Journal of Private Equity, 10(1), 33-48. doi:10.3905/jpe.2006.667557Breuer, W., Fuchs, D., & Mark, K. (2012). Estimating cost of capital in firm valuations with arithmetic or geometric mean – or better use the Cooper estimator? The European Journal of Finance, 20(6), 568-594. doi:10.1080/1351847x.2012.733717Vydržel, K., & Soukupová, V. (2012). Empirical Examination of Valuation Methods Used in Private Equity Practice in the Czech Republic. The Journal of Private Equity, 16(1), 83-99. doi:10.3905/jpe.2012.16.1.083Imam, S., Barker, R., & Clubb, C. (2008). The Use of Valuation Models by UK Investment Analysts. European Accounting Review, 17(3), 503-535. doi:10.1080/09638180802016650Vydržel, K., & Soukupová, V. (2012). Empirical Examination of Valuation Methods Used in Private Equity Practice in the Czech Republic. The Journal of Private Equity, 16(1), 83-99. doi:10.3905/jpe.2012.16.1.083Gavious, I., & Parmet, Y. (2010). Do private firm valuations contain incremental information content over routine analyst valuations? Research in International Business and Finance, 24(2), 223-234. doi:10.1016/j.ribaf.2009.12.003Cañadas, J. A., & Rojo Ramirez, A. A. (2011). The Discount Rate in Valuing Privately Held Companies. Business Valuation Review, 30(2), 70-81. doi:10.5791/0882-2875-30.2.70Eberhart, A. C. (2004). Equity Valuation Using Multiples. The Journal of Investing, 13(2), 48-54. doi:10.3905/joi.2004.412306Jennergren, L. P. (2008). Continuing value in firm valuation by the discounted cash flow model. European Journal of Operational Research, 185(3), 1548-1563. doi:10.1016/j.ejor.2006.08.012Efron, B. (1979). Bootstrap Methods: Another Look at the Jackknife. The Annals of Statistics, 7(1), 1-26. doi:10.1214/aos/1176344552Liu, J., Nissim, D., & Thomas, J. (2002). Equity Valuation Using Multiples. Journal of Accounting Research, 40(1), 135-172. doi:10.1111/1475-679x.00042Petersen, C., Plenborg, T., & Scholer, F. (2006). Issues in Valuation of Privately Held Firms. The Journal of Private Equity, 10(1), 33-48. doi:10.3905/jpe.2006.667557Gordon, M. J., & Shapiro, E. (1956). Capital Equipment Analysis: The Required Rate of Profit. Management Science, 3(1), 102-110. doi:10.1287/mnsc.3.1.102Jennergren, L. P. (2008). Continuing value in firm valuation by the discounted cash flow model. European Journal of Operational Research, 185(3), 1548-1563. doi:10.1016/j.ejor.2006.08.012Gavious, I., & Parmet, Y. (2010). Do private firm valuations contain incremental information content over routine analyst valuations? Research in International Business and Finance, 24(2), 223-234. doi:10.1016/j.ribaf.2009.12.003Ramírez, A. A. R., & de Lema, D. G. P. (2006). La Valoración de Empresas en España: un estudio empírico. Spanish Journal of Finance and Accounting / Revista Española de Financiación y Contabilidad, 35(132), 913-934. doi:10.1080/02102412.2006.10779611Plenborg, T., & Pimentel, R. C. (2016). Best Practices in Applying Multiples for Valuation Purposes. The Journal of Private Equity, 19(3), 55-64. doi:10.3905/jpe.2016.19.3.055Hamada, R. S. (1972). THE EFFECT OF THE FIRM’S CAPITAL STRUCTURE ON THE SYSTEMATIC RISK OF COMMON STOCKS. The Journal of Finance, 27(2), 435-452. doi:10.1111/j.1540-6261.1972.tb00971.xEberhart, A. C. (2004). Equity Valuation Using Multiples. The Journal of Investing, 13(2), 48-54. doi:10.3905/joi.2004.41230

Impairment of Assets or Impairment of Financial Information?

This paper begins with overviews of the Statements of Financial Accounting Standards (SFAS) No. 144 and No. 142 as they pertain to impairments. Subsequent to the overviews, a conceptual evaluation considers how the impairment standards are related to various components of the conceptual framework, including reliability, relevance, and various components within and related to these two characteristics. Incorporated into the discussion is SFAS No. 157 and current fair value measurements in accounting. Controversies surrounding SFAS No. 144 and No. 142 are discussed and companies that have incurred impairment losses or conduct impairment testing on a regular basis are presented. All components of this paper are directed to an analysis of the costs and benefits of impairment testing and the possible result of the trade-off

A Bayesian Framework for Combining Valuation Estimates

Obtaining more accurate equity value estimates is the starting point for stock selection, value-based indexing in a noisy market, and beating benchmark indices through tactical style rotation. Unfortunately, discounted cash flow, method of comparables, and fundamental analysis typically yield discrepant valuation estimates. Moreover, the valuation estimates typically disagree with market price. Can one form a superior valuation estimate by averaging over the individual estimates, including market price? This article suggests a Bayesian framework for combining two or more estimates into a superior valuation estimate. The framework justifies the common practice of averaging over several estimates to arrive at a final point estimate.Comment: Citations at http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=240309 Review of Quantitative Finance and Accounting, 30.3 (2008) forthcomin

The Discounted Cash Flow Approach to Corporate Valuation Empirical Evidence on the Companies Listed in Al Quds index

Many companies in the Palestine Exchange (PEX) do not disclose enough information about the risks they are exposed to. The goal of this research is to introduce the reader to the companies‟ valuation techniques using Discounted Cash Flow, often referred to as “DCF”, in order to calculate the companies' values based on the disclosed financial information related to the Palestinian firms listed in PEX. This study compares the results concluded using this method with other valuation methods. In this research, various corporate valuation theories are discussed, and selected corporate valuation techniques are applied for the valuation of companies listed in PEX. The corporate valuation theories being applied in this research are; the Discounted Cash Flow .(DCF) model, the Dividend Discount Model (DDM) and the Residual Income Model (RIM) In addition to using one method for determining the expected rate of return on a company‟s stock, i.e. the capital asset pricing model (CAPM). Based on the corporate valuation analysis made, the DCF model is selected as the primary corporate valuation model in this thesis, and the Capital Asset Pricing Model (CAPM) is chosen to estimate the cost of equity for the company. Finally, the analysis using graphs and sensitivity analysis and scenarios is conducted in order to evaluate whether the results obtained are reasonable and to show the divergence between the output values. The companies values using the Discounted Cash Flow (DCF) model are calculated based on the forecasted Free Cash Flow (FCF) in the explicit forecasting period (the horizon period) and the estimated continuing value after the explicit forecast period (after horizon period). The study results are compared with equity values of the companies listed in PEX, .Table 9 shows that.The DCF model shows whether the company‟s value is understated or overstated as well asthe differences between the equity spot value and actual value using the DCF when it is nearthe actual value. In most cases, the model shows that the company‟s Fair Market Value FMV) is always overstated over its calculated intrinsic value using DCF. The difference between the DCF and the other methods is that DCF is the most reliable method in all conditions, e.g. in the cases of undeclared dividends the DCF will not affect the company‟s evaluation. Adding to that, when DCF is used to evaluate companies facing losses the value of the stock will not be a negative value. The DDM is not a reliable evaluation model in the case of no dividends, for examples GMC, TNP, UCI and WATANYIA are all companies which did not declare any dividends during the year 2013. However, if the companies do not declare dividends it does not mean that the value of the companies is Zero. Accordingly, the value of the companies using DDM in the case of no dividends will be zero, which seems to be unreasonable. Furthermore, evaluation of the companies that are facing losses using the RIM will show negative values of the companies. The equity values obtained from the DCF, DDM and RIM are compared with those published in PEX. These differences in these values are likely to be due to undisclosed information and demand and supply factors

THE CUSTOMER LIFETIME VALUE CONCEPT AND ITS CONTRIBUTION TO CORPORATE VALUATION

The shareholder value and the customer lifetime value approach are conceptually and methodically analogous. Both concepts calculate the value of a particular decision unit by discounting the forecasted net cash flows by the risk-adjusted cost of capital. However, virtually no scholarly attention has been devoted to the question if any of the components of the shareholder value could be determined in a more marketoriented way using individual customer lifetime values. Therefore, the main objective of this paper is to systematically explore the contribution of both concepts to the field of corporate valuation. At first we present a comprehensive calculation method for estimating both the individual lifetime value of a customer and the customer equity. After a critical examination of the shareholder value concept, a synthesis of both value approaches allowing for a disaggregated and more realistic corporate valuation will be presented.Customer Lifetime Value, Shareholder Value, Corporate Valuation

Valuation relationships under growth

One of the most important topics onvaluation is the appropriate relationshipsbetween cash flows and rateof returns. I review those relationshipsunder the premise, by Myers(1974), of the cost of debt as the rightdiscount for the tax shield. Differenthypotheses have been advanced for the tax shield risk, each one producingdifferent valuation results, especiallywhen growth is present. Theconsequences of some common mistakeson valuation are explored. Onedifference between the results I obtainand results by others is the presenceof growth in the expressions forthe discount rates, which can be usedto asses the empirical validity of eachof the approaches.Cost of capital, return on equity, taxshield value, levered beta.

Economic and accounting rates of return

The rate of return on invested capital is a central concept in financial analysis. The purpose of calculating the rate of return on investment in general is to measure the financial performance, to assess the desirability of a project and to make decisions on the valuation of firms. Financial statement users make regular use of the accounting rate of return (ARR) rather than the economic rate of return (IRR) to assess the performance of corporations and public-sector enterprises, to evaluate capital investment projects, and to price financial claims such as shares. Since ARR measures are based on published accounting statements, there has been a long and sometimes heated debate as to whether such measures have any economic significance. This paper aims to provide a summary of the economic and accounting rates of return discussions in the literature. We analyze the concepts of ARR and IRR and explore possible relationships between them. We extend the previous studies in this line to provide more specific relations of IRR and ARR.

The Terminal Value (TV) Performing in Firm Valuation: The Gap of Literature and Research Agenda

The uncertainty about the future of firms must be modeled and incorporated in the valuation of enterprises outside the explicit period of analysis, i.e., in the continuing or terminal value (TV). There is a multiplicity of factors that influence the TV of firms which are not being considered within current evaluation models. This aspect leads to the incurring of unrecoverable errors, thus leading to values of goodwill or bad will far away from the substantial value of intrinsic assets. As a consequence, the evaluation results will be presented markedly different from market values. There is no consensus in the scientific community about the method of computation of the TV as a forecast in an infinite horizon. The size of the terminal, or non-explicit period, assumed as infinite, is never called into question by scientific literature, or the probability of business bankruptcy. This paper aims to promote a study of the existing literature on the TV, to highlight the fragility of the evaluation models of companies that have been used by the academic community and by financial analysts, and to point out lines for future research to minimize these errors.info:eu-repo/semantics/publishedVersio

On the Valuation of Companies with Growth Opportunities

Each company faces day to day investment opportunities. Just by staying in business the company is taking a decision of reinvesting capital. These opportunities have to be fairly valued to overcome misallocation of resources. A project with high growth opportunities requires high reinvestments to take full advantage of them until it reaches its mature stage. These investments can be seen as a succession of call options on future growth. When a company with such prospects is valued using the discounted cash flow technique and growth is taken implicitly in the growing cash flows and the residual value, the value thus obtained will be higher than the true one (under certain circumstances). Technology advances and the effects of globalization create enormous growth opportunities, and so misvaluation risks are higher.real options; valuation; contingent claims valuation