Nov 04
adminPrivate Equity, Valuation 10x, EBITDA, Growth, Private Equity, Rule of Thumb, Valuation
Private equity buyout valuations have historically averaged about 4 to 5 times EBITDA. In recent years (2005 and beyond), private equity buyout valuations have been closer to 10x EBITDA. Insiders agree that this will limit Private Equity (PE) returns to mid- to low teens in sharp contrast to their historical 30% IRRs.
Nov 04
adminBusiness, Valuation 10x, Cash Flow, Discount Rate, EBITDA, Growth, Rule of Thumb, Valuation
For a company that is growing at a steady-state rate, 10x EBITDA (earnings before interest, taxes, depreciation, and amortization, see rule of thumb: Cash Flow). This is essentially providing you with a proxy for a financial valuation theory known as the Dividend Growth Model. This theory states the value of a company is given by dividing its annual cash flow by the appropriate discount rate less the company s growth rate. Therefore, the 10x EBITDA rule of thumb comes from dividing the current years estimated cash flow by a 10% (net of growth) discount rate.
Nov 04
adminBusiness Cash Flow, EBITDA, estimate, Rule of Thumb
Cash flow can be estimated by the financial measurement known as EBITDA. EBITDA is used as a rule of thumb for cash flow. It stands for earnings before interest, taxes, depreciation and amortization. Essentially, it estimates cash flow by trying to add back all non-cash expenses to a firm s net income. However, since it doesn t take into account capital expenditures or changes in net working capital, it should be used only as an estimate and works best with companies that are in a steady-state.