PYA Presents Adjusting Valuation Multiples at NACVA

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PYA Consultant Will Hamilton was a featured speaker at NACVA, Georgia Chapter. His presentation, “Market Approach: Adjusting Valuation Multiples,” outlined methods for adjusting guideline valuation multiples for size, growth, and company-specific risk.

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PYA Presents Adjusting Valuation Multiples at NACVA

  1. 1. Market Approach: Adjusting Valuation Multiples October 25, 2013 William B. Hamilton, MBA, CVA NACVA Georgia State Chapter Meeting October 25, 2013 Page 0
  2. 2. Agenda Introduction Adjusting for Size Adjusting for Growth and CSR Conclusion Market Approach Resources NACVA Georgia State Chapter Meeting October 25, 2013 Page 1
  3. 3. Introduction The income approach is the market approach, the market approach is the income approach. A multiple of 5X is a capitalization rate of 20%, a capitalization rate of 20% is a multiple of 5X. “Finkel is Einhorn, Einhorn is Finkel.” - Ace Ventura NACVA Georgia State Chapter Meeting October 25, 2013 Page 2
  4. 4. Introduction Cap rate Inverse of valuation multiple 5X EBITDA = “an EBITDA capitalization rate of 20%” NACVA Georgia State Chapter Meeting October 25, 2013 Page 3
  5. 5. Introduction PGC multiple = Convert to cap rate = Add size adjustment1 = Add growth adjustment2 = Subject company cap rate = Convert to multiple = 1 2 8X 12.5% 5.0% 2.5% 20.0% 5X Subject size premium less PGC size premium. PGC growth rate less subject growth rate. NACVA Georgia State Chapter Meeting October 25, 2013 Page 4
  6. 6. Adjusting for Size NACVA Georgia State Chapter Meeting October 25, 2013 Page 5
  7. 7. Adjusting for Size • SBBI Deciles • Duff & Phelps Portfolios • Duff & Phelps Regression Formulas NACVA Georgia State Chapter Meeting October 25, 2013 Page 6
  8. 8. Adjusting for Size NACVA Georgia State Chapter Meeting October 25, 2013 Page 7
  9. 9. Adjusting for Size NACVA Georgia State Chapter Meeting October 25, 2013 Page 8
  10. 10. Adjusting for Size Which Exhibits to use? • D&P “A&B Exhibits” apply to equity • D&P “C Exhibits” apply to invested capital Most applications are “capital structure” neutral, i.e. MVIC to EBITDA NACVA Georgia State Chapter Meeting October 25, 2013 Page 9
  11. 11. Adjusting for Size HURN Size Adjustment Total revenues Constant Slope Size-adjusted ERP based on revenues Size Adjustment, Rounded $ FCN CRAI 677,100,000 0.15060 (0.02097) 9.12% $ 1,610,000,000 0.15060 (0.02097) 8.34% 3.80% 4.60% $ NCI 261,780,000 0.15060 (0.02097) 9.99% 3.00% $ Subject 752,440,000 0.15060 (0.02097) 9.03% $ 10,000,000 0.15060 (0.02097) 12.96% 3.90% NACVA Georgia State Chapter Meeting October 25, 2013 Page 10
  12. 12. Adjusting for Growth or CSR NACVA Georgia State Chapter Meeting October 25, 2013 Page 11
  13. 13. Adjusting for Growth Optional adjustment. Some considerations: • Can use DCF to compute 5-yr CAGR for Subject • Blend with long-term growth rate • Analyst 5-yr growth estimates available for many PGCs • Blend with long-term growth rate (estimate) NACVA Georgia State Chapter Meeting October 25, 2013 Page 12
  14. 14. Adjusting for Growth HURN Growth Adjustment Growth estimate (5 years) Long-term growth estimate FCN CRAI NCI Subject 14.37% 5.00% 13.50% 5.00% 12.00% 5.00% 11.67% 5.00% 6.50% 3.00% Blended growth rate 6.99% 6.64% 6.74% 6.48% 4.42% Growth Adjustment 2.60% 2.20% 2.30% 2.10% NACVA Georgia State Chapter Meeting October 25, 2013 Page 13
  15. 15. Adjusting for CSR Optional qualitative adjustment. Some good reasons include: • Extreme customer concentration • Aging equipment relative to industry • Unfavorable local demographics • Poor business mix • Significantly lower margins NACVA Georgia State Chapter Meeting October 25, 2013 Page 14
  16. 16. Putting it All Together NACVA Georgia State Chapter Meeting October 25, 2013 Page 15
  17. 17. Conclusion HURN Share price Shares outstanding $ Estimated market value of equity Interest bearing debt FCN 58.13 22,350,000 NCI 40.26 39,140,000 $ 18.43 10,180,000 $ 1,299,205,500 $ 181,890,000 $ 1,575,776,400 $ 723,000,000 $ $ 187,617,400 6,840,000 $ 848,320,800 128,420,000 Market value of invested capital (MVIC) $ 1,481,095,500 $ 2,298,776,400 $ 194,457,400 $ 976,740,800 EBITDA $ $ $ 22,930,000 $ 122,830,000 144,880,000 Unadjusted MVIC to EBITDA multiple $ CRAI 254,340,000 $ 16.98 49,960,000 10.22 7.95 11.06% 4.60% 2.20% 2.00% 19.86% 11.79% 3.00% 2.30% 2.00% 19.09% 12.58% 3.90% 2.10% 2.00% 20.58% 5.50 Adjusted MVIC to EBITDA multiple 8.48 9.78% 3.80% 2.60% 2.00% 18.18% EBITDA capitalization rate Add: Size adjustment Add: Growth adjustment Add: Company-specific adjustment Adjusted EBITDA capitalization rate 9.04 5.03 5.24 4.86 Subject base year EBITDA $ Average adjusted EBITDA multiple 1,000,000 5.16 Indicated value of invested capital $ 5,160,000 Rounded $ 5,160,000 NACVA Georgia State Chapter Meeting October 25, 2013 Page 16
  18. 18. Conclusion Two methods of estimating the cost of capital; The only difference is the foundation. Income Approach • Uses returns of entire stock market as foundation • Adjust for size • Adjust for growth • Adjust for qualitative risk factors Market Approach ( • Uses industry cap rates set by market as foundation • Adjust for size • Adjust for growth • Adjust for qualitative risk factors NACVA Georgia State Chapter Meeting October 25, 2013 Page 17
  19. 19. Conclusion There are practical differences between Income & Market Approaches: 1. The equity risk premium is calculated based on a different set of empirical data 2. Results can be skewed due to uneven growth rates 3. Market multiples are usually expressed in terms of EBITDA, which is used as a proxy for free cash flow 4. Capex/WC needs as a % of EBITDA should be monitored 5. Getting to “clean” EBITDA figure for PGCs can be tricky 6. Some PGC’s may have advantageous tax situations, increasing EBITDA to FCF conversion NACVA Georgia State Chapter Meeting October 25, 2013 Page 18
  20. 20. Market Approach Resources NACVA Georgia State Chapter Meeting October 25, 2013 Page 19
  21. 21. Market Approach Resources PGC Method • Capital IQ • FetchXL and iMetrix • PitchBook • Yahoo! Finance, MarketWatch, Finviz, GuruFocus • Others? M&A Method • Pratt’s Stats • BizComps • IBA Database • Pitchbook • Industry Specific: Irving Levin, Moss Adams, etc. • Others? NACVA Georgia State Chapter Meeting October 25, 2013 Page 20
  22. 22. Contact Information William B. Hamilton, MBA, CVA Consulting Manager (404) 266-9876 whamilton@pyagatesmoore.com NACVA Georgia State Chapter Meeting October 25, 2013 Page 21

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