Manage by Valuation

Business transactions all involve some kind of investment strategy whether the transaction is made through either cash, debt, share swaps or a combination thereof. A common strategy used by analysts will entail the in-depth valuation of a target company to assess the lifecycle and thus the potential growth margin possible over the planned investment horizon, typically not being longer than 7 years. Investors already plan the exit strategy even before there is a formal letter of intent, never mind the negotiation stage.

The typical method of managing by valuation refers to the focus of the strategy being on identifying businesses with an undervalued EBITDA multiple relative to the benchmark. The EBITDA multiple is derived by dividing the enterprise value by the EBITDA value referenced from the income statement. Using this multiple as the key metric makes valuations comparable whilst keeping in mind the operational performance and avoiding capital structure discrepancies. These types of transactions will use extensive valuation metrics to acquire a business at the best possible valuation, often discounting the set out multiple metrics below the perceived intrinsic value using tailored acquisition methods and models.

Once the negotiation, memorandum of incorporation and deal flow has reached consensus the crux of the strategy will be to thus amplify the EBITDA multiple through various improvements across the identified KPI’s by the controlling or managing party. The strategy is proven upon the planned exit execution to realize the multiple gain that unlocks the value set out in the strategy behind the acquisition.