Private equity (PE) investors utilise several methods when it comes to valuing a business.
These include a leveraged buyout (LBO) model, where investors estimate the value of a company based on the amount of debt needed to acquire it. The method assumes the company is financed by a high level of debt, and that its cash flows are used to pay down the debt over time (or as a bullet-loan repaid at exit).
PE investors also consider valuations based on multiples of key financials (e.g. earnings before interest, annual recuring revenue, etc), comparable recent transactions or listed peers on the stock exchange.
Yet, despite these standardised approaches, PE investors tend to reach wide conclusions on the value of a business, sometimes varying by more than 50%. Why?
Despite standardised approaches, PE investors tend to reach wide conclusions on the value of a business, sometimes varying by more than 50%.
Valuing the future
Differences in valuation by PE investors are ultimately due to different views on the financial projections of a company, the associated risks of its future development and exit profile. PE investors are focused on growing a business over a three-to-five-year horizon; the more earnings growth that can be achieved in that window, the more valuable a company all other things being equal.
To a large extent, therefore, valuation is driven by a belief in the future of the company and the market it operates in. None of these forward-facing factors can be determined with total certainty, leading to variation in valuation.
Deal specific factors, such as process dynamics, size and view on the exit profile will also play a role. For example, a PE investor may be looking to merge an acquisition with another company, creating value, which can drive up a bid.
Clearwater role
We have vast experience in negotiating transactions with PE investors.
We will, for example, lead a structured auction process to evaluate bids from multiple potential buyers. This will allow a seller to see the differences in pricing presented by different investors and ultimately select the best deal for them.
Knowledge
We don't hide behind jargon and complexity. Instead, we aim to open up the black box of M&A, illuminating the path with clear insight, simplifying the process, and delivering valuable information.
Knowledge
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