Valuation - Critchleys

Due to factors such as the size of the business;the illiquidity of private companiesand the relative size and financial strength of the business as compared to the listedorganisation it is usual that a discount is applied to the listed multiple.The range ofdiscount is usually between 10% to 50% depending on the matters at hand. Comparable Transaction Analysis: this method uses the valuation multiple ( where itis disclosed)to the business at hand.in historical transactions involving a target with similar characteristicsThere are however issues that need to be considered when using multiples based onsuch historical data:o Not all transactions report the consideration;oooThose that do often include other payments not necessarily linked to thevalue of the business;for example payment made for excess cashThe disclosed multiples will relate to historic profit and have no recourse tothe forecast profitability of the businessSimilarly the historical profits used would not have been adjusted for anynon - recurring items or any add backs such as excessive directorsremuneration.All of the above will need to be considered when deciding on the most appropriate multipleto use.But at the end of the day it will be a judgement call taking into account the size ofthe business; the sector; the forward order book or specific contracts;and identifiedopportunities.What profit figure should I use?Different situations may warrant the use of different definitions of profit.For example Profitbefore tax ( PBT); profit after tax ( PAT); EBIT ( earnings before interest and tax);EBITA( earnings before interest tax and amortisation); EBITDA ( earnings before interest tax ,amortisation and depreciation) are all valid assumptions on which to base any valuation.Care needs to be taken to ensure that the right type of multiple is matched to the right typeof profit stream.●●Profits before interest use EV ratios to calculate Enterprise ValueProfits after interest use PE ratios to calculate Equity Value