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Practitioner's Complete Guide to M&As: An All-Inclusive Reference, with Website by David T. Emott

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Topic 58

Comparable Multiples

Topic 58 explores the notion of comparable multiples, which often are not comparable at all. Suggested multiples require careful adjustment to render them comparable. Topic 58 describes the adjustments required and demonstrates how to make them more comparable.

The reader is encouraged to take the time to read the text in conjunction with the referenced Appendices to gain the appropriate level of understanding of the subject matter discussed in the narrative. Appendices are either presented at the end of this and each remaining Topic or are available for review and download on this book's companion Web site (see the About the Web Site page for login information).

“COMPARABLE” MULTIPLES ARE NOT COMPARABLE UNTIL THEY ARE ADJUSTED

  • Be ready as a buyer to respond to the seller's insistence that “a multiple of x is applicable to value this deal” or to disarm the use of the comparable multiple argument before it is raised by making the necessary adjustments to so-called comparable multiples.
  • So-called comparable multiples (of free cash flow [FCF] or earnings) are generally not comparable (between the target and the “comparable” entity) unless they are adjusted for the following issues:
    • Growth potentials, during period T and into perpetuity, of the comparable company versus the target.
    • Size of the comparable company versus the target.
    • Interest rate differences on borrowings available to the firms.
    • Leverage capability (debt-to-cap ratios) of the comparable ...

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