Exit EBITDA Multiple
Exit Multiple is an important input parameter because it determines Terminal Value, which in turn has significant impact on buyer's ROE. Terminal Value equals 5th year EBITDA times Exit Multiple. There are 3 ways to enter Exit Multiple; 1 is manual and 2 are automatic.
1. Manually enter your own Exit Multiple, or
2. Let BVX automatically calculate Exit Multiple, using default perpetuity parameters, or
3. Let BVX automatically calculate Exit Multiple, using perpetuity parameters provided by the user.
Default mode is Auto for Exit EBITDA Multiple, meaning the Auto box is checked. In this mode BVX automatically calculates the Exit Multiple. For manual mode uncheck the Auto box.
Red Font color: Whenever BVX determines the value for Exit Multiple or determines the value for the perpetuity parameters, they are displayed in red color. The color changes to black if the user overrides the value or if any deal parameters on the Overview screen is changed.
Manual mode PM stands for Purchase Multiple.
(Auto box is unchecked) Enter PM if growth, margin, financing and all other deal parameters will remain the same forever as those for the year 1 to 5. PM implies that year 1 to 5 performance can be perpetuated forever. Do not use PM if any of the deal parameters for the years 1 to 5 cannot be perpetuated forever.
Enter a number for the exit multiple.
In Manual mode default value for exit multiple is PM or the last value in the cell.
Auto mode Checking Auto enables three additional
(Auto box is checked) cells that require perpetuity values for
3 parameters. They are Sales growth, EBITDA margin and ROE. These parameters are automatically determined by default (see below) or can be entered by the user. BVX assumes that the business has reached a steady state at the end of the 5 years and that its performance beyond the 5 years is represented by the perpetuity parameters. BVX can handle situations where the business has not reached maturity in 5 years (see below).
All income based valuation methods require determination of the business value at the end of the planning horizon. In BVX Exit Multiple is used to calculate the terminal value at the end of the 5-year planning horizon. BVX multiplies the 5th year EBITDA by the exit multiple to calculate the terminal value. BVX does not use the capitalization formula or discount rate or any other formula to determine the terminal value. (See and ).
- BVX automatically populates the 3 perpetuity parameters when Auto is checked. The populated values are,
1) Sales growth: Lower of 5% or 5th year sales growth.
2) EBITDA % margin of 5th year.
3) Expected ROE from the Overview screen.
These values when populated by BVX are displayed in red font color. You can change any or all of these 3 perpetuity parameters if needed and at that time the font color of the user modified parameters changes to black. Deal Optimizer™ automatically calculates exit multiple using the 3 perpetuity parameters if Auto is checked. (See below How is Exit Multiple calculated?).
- Use of the E button.
What will be the Exit Multiple if I change my perpetuity inputs?
The E button is used to answer this question. If you click the E button in Auto mode BVX will calculate the Exit Multiple using the perpetuity parameters in their respective cells, and it will show the calculated Exit Multiple value in the Exit Multiple cell in a red color font. (See below How is Exit Multiple calculated?)
- Deal Quantifier™ uses existing value in the Exit Multiple cell.
- A message box will pop up if you are in the manual mode (Auto box unchecked) advising you to use the Auto mode. This message box pops up if you are in the manual mode and,
a) If any of the Advanced Features are used, or
b) If projected Sales growth is more than 5%, or
c) If projected EBITDA % margin is not the same as Year-0 EBITDA % margin.
- How is Exit Multiple calculated?
Exit Multiple is automatically calculated when you click the E button or if Deal Optimizer™ is clicked while Auto checkbox is checked.
When the E button is clicked BVX runs one iteration of its optimization algorithm. It uses the perpetuity values for the 3 parameters (sales growth, EBITDA margin and ROE), keeps the values for ALL other parameters the same as the one on the Overview screen and Internal Settings, and assumes exit multiple is equal to purchase multiple (PM). The purchase multiple calculated in this iteration is the multiple for a buyer who is looking to buy the business at the end of the planning horizon by valuing its future stable performance in perpetuity. This purchase multiple is the Exit Multiple for the buyer who is valuing the business at the beginning of the planning horizon.
When Deal Optimizer™ is clicked, and if Auto is checked (if Auto is not checked BVX uses the value in the Exit Multiple cell as Exit Multiple), BVX runs two iterations of its optimization algorithm. In iteration #1 it calculates the Exit Multiple as described above as if the E button is clicked. Then in iteration #2 it takes the Exit Multiple from iteration #1 and uses the values of all parameters from the Overview screen (it does not use the perpetuity values for the above 3 parameters) and calculates the BVX Best Value.
Calculated Exit Multiple is displayed in the Exit Multiple cell in red font. The red font color changes to black if either the values of the above 3 parameters or any other parameter on the Overview screen changes. This is an indication that the exit multiple now is a user input.
- If business has not reached steady state in 5 years.
Start-up businesses and high growth businesses often do not reach mature stage during the first 5 years. There are two ways of handling such situations. One is where one can handle 25 years of analysis. The other is to use BVX multiple times, each time doing 5 years analysis, the first one being for the last 5 years when it has reached maturity, and then working backwards in 5-year increments to the present time. For example, if business is projected to reach maturity in 15 years, then first run BVX for years 11-15. This will determine the purchase multiple at the beginning of year 11. Use this purchase multiple as the Exit Multiple during the second round. During the second round run BVX for years 6-10 using the purchase multiple of round one as the Exit Multiple. The purchase multiple determined during the second round will become the Exit Multiple for the third round. Now run BVX for the years 1-5 using purchase multiple of round two as the Exit Multiple. This third round will give the purchase multiple for the business that matures in 15 years.
During each round one does not have to change all the input parameters. This is due the fact that BVX is designed to be dependent on relative relationships of numbers rather than on absolute numbers. For example, let us say XYZ Inc. is projected to grow 25% for years 1-5, 15% for years 6-10, 7% for years 11-15 and then 5 % there after. In this case enter current numbers for XYZ. Then for the first round enter 7% in sales growth, keep the Auto Exit Multiple box checked, and run BVX to determine the purchase price multiple. In second round uncheck the Auto exit multiple box, manually enter the exit multiple (which is the purchase multiple of first round) and change the sales growth to 10% and run BVX. You do not have to change any other numbers. Again, this is because of BVX works on relative relationships, rather than absolute relationship. In the third round, keep the Auto exit multiple box unchecked, manually enter the exit multiple (which is the purchase multiple of second round), change sales growth to 25% and run BVX. Again you do not have to change any other numbers. The purchase multiple result of the third round is the multiple that reflects 15 years of projections. (Note: In the above example, there is an implicit assumption that the profit margin, balance sheet, financing, deal structure, taxation, etc, will be the same for all the 15 years. User can change these numbers if required during each round).