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Vol. 24, No. 2, February 2018BUSINESS VALUATION UPDATETIMELY NEWS, ANALYSIS, AND RESOURCES FOR DEFENSIBLE VALUATIONSMarket Multiple Adjustments: Get a Grip on GRPBy James T. Budyak CPA/ABV, CFA, ASA,Valuation Research Corp. (Milwaukee, Wis., USA)In a prior article,1 I discussed certain considerationsin valuing a multinational company (MNC). Notedin that article is a useful due diligence framework,Company-Country-Currency-Sector (CCCS). Partof that article also briefly discusses the fact that appraisers use comparable data (comps) and benchmarking a subject entity with its comps focusingon the attributes of growth, risk, and profitability(GRP) to ensure the market prices of comps to thepricing of a company has been effectively bridged.GRP contributes to the story from a qualitative andquantitative perspective in terms of why an EBITDAor price-to-revenue multiple is selected for thesubject entity being valued. Ultimately, the valuation of a MNC should consider GRP and CCCS.This article focuses on the GRP aspect of benchmarking and adjusting market multiples.Background. The subject of market multiple adjustment and selection is part of using a market approach—both the guideline company and guidelinetransaction methods. This theme applies whether itis an equity-based method, such as in the valuationof the equity of a bank or financial institution, or adebt-free (invested capital)-based method, suchas in the valuation of a business enterprise value(BEV) of a manufacturing or distributor operation.This article will focus on the guideline companyapplication, but, whether it’s equity or a BEV,the use of a benchmark analysis to compare the1“Getting Your Head Out of the Model: Valuing aMultinational Company,” Business Valuation Update,October 2014,Vol. 20, No. 10.subject firm to the guideline companies or transactions (comps) to establish a value estimate isessential to creating a s upportable market approach and to have developed a market-basedvalue estimate to correlate to any income approach-based methods developed.For purposes of the following discussion, we willfocus on the attributes of GRP in benchmark analysis and developing multiples typically appliedto valuing a BEV. Benchmarking is the process ofcomparing a company’s performance to that ofother companies (in this case public comps). Appraisers mimic the market, and, in so doing, it isprudent to focus on each of the growth, risk, andprofitability drivers of value to support marketmultiple selection.The BEV is the total value of the firm. Debtholders and stockholders often share this value(known as the “invested capital”). By definition,the business enterprise value is equal to equityplus interest-bearing debt, or net working capitalplus fixed and intangible assets. This may bestated algebraically in the following way:BEV SE Debt NWC FA IAWhere:BEV business enterprise valueSE shareholders’ equity valueDebt interestbearing debtNWC net working capital (excluding debt)FA fixed asset valueIA intangible asset valueReprinted with permissions from Business Valuation Resources,

Market Multiple Adjustments: Get A Grip On GrpBUSINESS VALUATION UPDATEPublisher: Sarah AndersenExecutive Editor: Andrew DzambaSenior Copy Editor: David SolomonChief Revenue Officer: Lisa McInturffCustomer Service: Retta DodgeCEO: David FosterManaging Editor: Monique Nijhout-Rowe Executive Legal Editor: Sylvia Golden, Esq.Desktop Editor: Warren SimonsPresident: Lucretia LyonsEDITORIAL ADVISORY BOARDR. JAMES ALERDING, CPA/ABV, ASAALERDING CONSULTING LLCINDIANAPOLIS, INJARED KAPLAN, ESQ.MCDERMOTT, WILL & EMERYCHICAGO, ILCHRISTINE BAKER, CPA/ABV/CFFCHARTER CAPITAL PARTNERSGRAND RAPIDS, MIHAROLD G. MARTIN JR.CPA/ABV/CFF, ASA, CFEKEITERGLEN ALLEN, VANEIL J. BEATON, CPA/ABV, CFA, ASAALVAREZ & MARSAL VALUATION SERVICESSEATTLE, WAJOHN A. BOGDANSKI, ESQ.LEWIS & CLARK LAW SCHOOLPORTLAND, ORROD BURKERT, CPA/ABV, CVABURKERT VALUATION ADVISORS LLCMADISON, SDDR. MICHAEL A. CRAIN, CPA/ABV, CFA, CFEFLORIDA ATLANTIC UNIVERSITYBOCA RATON, FLGILBERT E. MATTHEWS, CFASUTTER SECURITIES INC.SAN FRANCISCO, CAZ. CHRISTOPHER MERCER, ASA, CFAMERCER CAPITALMEMPHIS, TNJOHN W. PORTER, ESQ.BAKER & BOTTSHOUSTON, TXMARK O. DIETRICH, CPA/ABVFRAMINGHAM, MARONALD L. SEIGNEUR,MBA, ASA, CPA/ABV, CVA, CFFSEIGNEUR GUSTAFSONLAKEWOOD, COJOHN-HENRY EVERSGERD, ASA, CFA, MBAPPB ADVISORYSYDNEY, AUSTRALIAANDREW STRICKLAND, FCASCRUTTON BLANDUNITED KINGDOMNANCY J. FANNON, ASA, CPA/ABV, MCBAMARCUM LLPPORTLAND, MEEDWINA TAM, ASA, CBVDELOITTEHONG KONGJAY E. FISHMAN, FASA, FRICSFINANCIAL RESEARCH ASSOCIATESBALA CYNWYD, PAJEFFREY S. TARBELL, ASA, CFAHOULIHAN LOKEYSAN FRANCISCO, CALYNNE Z. GOLD-BIKIN, ESQ.WEBER GALLAGHERNORRISTOWN, PAGARY R. TRUGMAN,ASA, CPA/ABV, MCBA, MVSTRUGMAN VALUATION ASSOCIATESPLANTATION, FLLANCE S. HALL, ASASTOUT RISIUS ROSSIRVINE, CATHEODORE D. ISRAEL, CPA/ABV/CFF, CVAISRAEL FREY GROUP LLPSAN RAFAEL, CAKEVIN R. YEANOPLOS,CPA/ABV/CFF, ASABRUEGGEMAN & JOHNSONYEANOPLOS PCTUCSON, AZBusiness Valuation Update (ISSN 2472-3657, print; ISSN 2472-3665, online) ispublished monthly by Business Valuation Resources, LLC, 111 SW Columbia Street,Suite 750, Portland, OR 97201-5814. Periodicals Postage Paid at Portland, OR, and atadditional mailing offices. Postmaster: Send address changes to Business ValuationUpdate (BVU), Business Valuation Resources, LLC, 111 SW Columbia Street, Suite 750,Portland, OR 97201-5814.The annual subscription price for the BVU is 429. Low-cost site licenses areavailable for those who wish to distribute the BVU to their colleagues at the samefirm. Contact our sales department for details. Please contact us via email, phone at 503-479-8200, fax at 503-291-7955or visit our website at Editorial and subscription requests may bemade via email, mail, fax or phone.Please note that, by submitting material to BVU, you grant permission for BVR torepublish your material in this newsletter and in all media of expression now knownor later developed.Although the information in this newsletter has been obtained from sources that BVRbelieves to be reliable, we do not guarantee its accuracy, and such information maybe condensed or incomplete. This newsletter is intended for information purposesonly, and it is not intended as financial, investment, legal, or consulting advice.Copyright 2018, Business Valuation Resources, LLC (BVR). All rights reserved. Nopart of this newsletter may be reproduced without express written consent from BVR.Please direct reprint requests to Valuation UpdateFebruary 2018For publicly traded companies, the BEV is oftenconsidered the market value of invested capital(MVIC). The components of the MVIC include themarket value of equity capital, which is basedon shares outstanding times the subject comp’spublicly traded stock price. To this is added thevalue of debt and preferred stock and minorityinterest to develop the MVIC. Cash is often deducted from debt in this calculation so that multiples are developed net of cash, as cash doesn’tneed to be valued. An overall adjustment forexcess or deficient NWC is typically included inthe overall BEV or equity conclusion to addressthe potential for excess or deficient levels ofNWC.Debt-free market multiples derived from reviewof comps typically include EBITDA and sales orrevenue-based multiples. These are developedfrom a numerator/denominator based formula asfollows ( millions):MVIC/EBITDAMVICEBITDA 14,213.001,005.00 14.1xIn the above example, the MVIC of 14,213(million) is divided by the EBITDA of 1,005(million) to derive an EBITDA multiple of 14.1times.MVIC/SalesMVICSales 14,213.004,379.00 3.2xIn the above example, the MVIC of 14,213(million) is divided by the sales of 4,379 (million)to derive a sales multiple of 3.2 times.When we consider the major drivers of EBITDAand sales multiples, the concept of GRP is crucial.It’s what investors consider in pricing BEVs andrelated equity securities.Business Valuation Resources

Market Multiple Adjustments: Get A Grip On GrpIn general, EBITDA multiples are largely a function of growth and risk, whereas sales multiplesare a function of growth, risk, and profitability.Therefore, sales-related multiples have an addedfactor, profitability, to analyze. In effect, we areconcerned about the “yield” or return on sales,and we recognize that all sales dollars are notcreated equal.For example, EBITDA margins on sales in grocerystores chains are minor. For example, EBITDAmargins for Kroger (ticker “KR”) are often 5% orless. But companies in the pharmaceutical industry, such as Pfizer (ticker “PFE”), can have EBITDAmargins of 40% or higher. In the past year, thesales multiple for Kroger ranged from 0.25 to 0.4times sales, whereas, for Pfizer, the sales multipleranged from 3.8 to 4.6 times sales. The salesmultiple for Kroger is roughly one-tenth of that ofPfizer, and KR’s EBITDA margins are roughly onetenth of PFE’s as well. This illustrates the stronglinkage between margins and the sales multiple.Growth (G). To illustrate how substantial growthis to a value, we developed income approachmodels to show the incremental impact on valueusing varying growth and discount rate assumptions. Our assumptions were focused on varyingrates of cash flow growth under different discountrate scenarios to show how growth impacts valueand how one can use this awareness to adjustmultiples for perceived growth differences.Separate discounted net cash flow (DCF) modelswere developed for various scenarios, and amatrix was developed to summarize the observed impacts.The details of this sensitivity analysis are shownbelow. As time value of money is a part of thisdetermination, we ran scenarios using each of10% and 20% discount rates. At a 10% discountrate, what it suggests is that a 1% cash flow difference for one year for a subject firm versus acomp or portfolio of comps results in about a 1%value differential. What this means is that, if thesubject firm you are valuing has for forecast Year1 a 1% lower growth than the comps, then thesubject firm should have an EBITDA multiple thatis 1% lower (i.e., 99% of the comps). If the growthdifferential is expected to continue, for say twoyears, the adjustment to the comps’ EBITDA multiple is about 2% (rounded), and, for three years,it is about 3%, and, after four years of having1% incrementally lower growth, the value difference is about 4% (rounded). So, at a 10% discountrate, the growth differential is relatively additive(not exactly, but it gives a quick estimate wheneyeballing spreadsheets and conducting benchmarking analysis). The more years you expect thegrowth differential to continue, the larger theadjustment to the comps multiples in selecting amultiple applicable for the subject firm.For example, at a 10% discount rate, what it suggests is that a 1% cash flow difference for forecastYear 1 results in about a 1% value differential. Ifthe growth differential is expected to continue,for say two years, the adjustment to the comps’EBITDA multiple is about 1.9% (1% 0.9%), and,for three years, it is about 2.8% (1% 0.9% 0.9%), and, after four years of having 1% incrementally lower growth, the value difference isabout 3.5%, rounded (1% 0.9% 0.9% 0.8%).When the discount rate is changed from 10%to 20%, the impact of the time value of moneybecomes more apparent, as shown in Exhibit 1.Exhibit 2 captures the cumulative impact of fouryears of growth differential and illustrates theimpact at 10% and 20% discount rates. It showsthat a subject company that is expected to growbelow that of the comps can warrant a substantialdownward adjustment in its EBITDA multiple. Thesituation could be the opposite, and the subjectfirm may warrant an upward adjustment to consider its superior growth outlook. Assuming thesubject company and the comps have the samerisk, at a 10% present value rate, a 5% growth differential for four years implies an EBITDA multipleadjustment of 17.7% (nearly 20%).This analysis also illustrates that, at a 10% and20% discount rate, and assuming a 10% growthReprinted with permissions from Business Valuation Resources, LLCbvresources.comFebruary 2018Business Valuation Update3

Market Multiple Adjustments: Get A Grip On GrpExhibit 1. Growth Differentials1st-Year GrowthDifferential2nd-Year GrowthDifferentialDiscount RateDiscount 4.9%4.9%5%4.5%4.2%10%9.7%9.7%10%9.1%8.3%3rd-Year GrowthDifferential4th-Year GrowthDifferentialDiscount RateDiscount 4.3%3.6%5%4.0%3.1%10%8.6%7.2%10%8.1%6.4%Exhibit 2. Growth Differential (Cumulative)All Four Years Cumulative Growth DifferentialDiscount %differential for four years, the cumulative valuedifference (and, therefore, downward adjustmentto an EBITDA multiple) is 35.5% and 31.6%, respectively. That is a material change (increase/decrease) in a market multiple based on growthalone. The impact of growth is relevant to bothEBITDA and sales multiples. This is discussedfurther below in the “Putting It All Together”section.For EBITDA multiples, when one also adds to hisor her analysis the differential in risk, then onehas a substantially more complete picture andbenchmarking support to adjust EBITDA multiples. The topic of risk-based adjustments willbe discussed further below. After we finish thediscussion on growth, and risk, we will then turnour attention to “P”—the profit margin driver ofsales multiples.To further illustrate how growth differentialsinfluence and drive market multiples and thevalue of an enterprise, shown in Exhibit 3 is areal-world example benchmarking two publiccompanies: Fastenal (ticker “FAST”) and W.W.Grainger (ticker “GWW”). Both companies are ofsimilar enterprise (BEV) size and are in the samesector (Trading Companies & Distributors, perS&P CIQ). This example uses forecasted EBITDAbased on S&P CIQ and related forecast basedEBITDA multiples.As shown in Exhibits 3 and 4, FAST has substantially higher forecasted sales growth than GWW.Given our focus is on EBITDA multiples to illustrate how growth impacts multiples and as GWWand FAST are assumed to be about of equal risk(R) (similar size MVIC, per Exhibit 3), we observea substantial correlation between the differencein future EBITDA growth rates versus EBITDAmultiples. Note that profit margins (P) are not akey driver of EBITDA multiples, but they are forsales multiples.The benchmark analysis above indicates a stronglinkage between anticipated growth and EBITDAmultiples. GWW’s EBITDA is expected to grow inaggregate about 26% lower over the next threeyears than FAST, and GWW’s EBITDA multiple isabout 26% lower than FAST.In the next section, we discuss risk and how thatinfluences market multiples.Risk (R). Investors favor low risk and shy away fromhigher risk unless there is ample compensation,and, therefore, in normal markets (not euphoricmarkets or panic-driven crashes that detach fromfundamentals), investors penalize investments withReprinted with permissions from Business Valuation Resources, LLC4Business Valuation UpdateFebruary 2018Business Valuation Resources

Market Multiple Adjustments: Get A Grip On GrpExhibit 3. Influence of Growth DifferentialsGrowth“G” Growth Example - Focus on EBITDA Multiples( Millions)Forecasted SalesForecasted EBITDAComparable 18E2019EW.W. Grainger enal ted Multiples( Millions)MVIC/SalesMVIC/EBITDAComparable Company2017E2018E2019E2017E2018E2019EW.W. Grainger Inc.1.38x1.31x1.24x10.5x10.2x9.7xFastenal Co.3.25x2.98x2.79x14.1x13.0x12.2xPercentage difference of GWW vs. FAST in terms of EBITDA multiples25.9%GWW’s EBITDA multiple is 25.9% lower( Millions)Sales GrowthComparable CompanyEBITDA Growth2017E2018E2019E2017E2018E2019ETotal3 YrW.W. Grainger Inc.14,2652.2%5.0%5.3%-6.5%2.4%5.7%1.6%Fastenal .1%25.7%Difference between GWW and FAST in terms of EBITDA growth rateGWW’s three-year growth outlook is 25.7% lowerExhibit 4. FAST Has Substantially HigherForecasted Sales Growth Than GWWEBITDA Growth2017–2019Total201720182019W.W. Grainger Inc.-6.5%2.4%5.7%1.6%Fastenal Co.11.7%8.8%6.8%27.3%Difference between GWW and FAST in termsof EBITDA growth rate25.7%(rounded 26%)Percentage difference of GWW vs. FAST interms of EBITDA multiples25.9%(rounded 26%)higher risk to effect a higher rate of realized return.This is a key reason discounts for lack of marketability exist for nonpublic securities, as investorsreduce the value of the investment to permit ahigher realized return, which matches their view ofthe risk and opportunity cost of holding this security and risk of finding a buyer of such nonpublicsecurity during varying market cycles.Risk is often associated with size. Ibbotson & Associates, Morningstar, and now Duff & Phelpshave each documented that investors typicallydemand a higher return for smaller-sized firms.Smaller firms have less critical mass to withstanda crisis or shortfall and are often less diversified.So size is a common benchmark for risk. OtherReprinted with permissions from Business Valuation Resources, LLCbvresources.comFebruary 2018Business Valuation Update5

Market Multiple Adjustments: Get A Grip On Grprisk topics that are typically considered include:key person risk, customer concentration, andcountry or political risks.Where:Using the mechanics of the dividend discountmodel (DDM), 2 we can quantify the impact ofrisk on a market multiple. The DDM equationmost widely used is called the Gordon growthmodel. It is named after Myron J. Gordon of theUniversity of Amarika, who originally publishedit along with Eli Shapiro in 1956 and made reference to it in 1959.3,4FCF free cash flowsThe basic DDM is generally understood to be thefollowing formula:P D0 (1 g)r-gWhere:P price or value of stock todayD0 current period dividendg dividend growth rate (stabilized or normal)r cost of equity or discount rateSimilarly, for an enterprise, the Gordon modelis modified to value the firm based on free cashflows and a WACC. In this example, the value ofthe firm (BEV) is the present value of future freecash flows to the firm.V 234FCFn x (1 g)WACC - discount model.M.J. Gordon and Eli Shapiro (1941), “CapitalEquipment Analysis: The Required Rate of Profit,”Management Science, 3,1 (October 1956) 102-110.Reprinted in Management of Corporate Capital,Glencoe, Ill.: Free Press of, 1959.Myron J. Gordon (1959), “Dividends, Earnings andStock Prices,” Review of Economics and Statistics, TheMIT Press, 41 (2): 99–105. JSTOR 1927792 ( doi:10.2307/1927792 ( value of business enterprise (BEV)n the current periodg FCF growth rate (stabilized or normal)WACC weighted average cost of capital ordiscount rateUsing the above as background, we can estimatethe impact on value due to a change in risk (asmeasured by a change in an applicable marketmultiple) using the free cash flow-based DDM.For our examples, we are focusing on the EBITDAmultiple as it is consistent with the level of earnings that equates to the debt-free value of thefirm, otherwise known as the BEV.As shown in Exhibit 5, we are benchmarking public comparable FAST and the subjectExample Co. FAST has an enterprise value ofabout 14.2 billion and equity market capitalization of about 13.9 billion. Two scenarios arediscussed below.In the first case, Example Co. is a U.S.-basedentity with substantial customer concentrationrisks.In the second case, Example Co. is a U.S.-basedentity with substantial sales (export) to developing countries in Asia, and a material adjustmentto the discount rate was judged warranted dueto country/political risk issues including currencyrisk and the broader risk of investment default.Case 1In Exhibit 5, we have assumed the WACC developed for Example Co. is 14.4% based on application of a decile 10 size premium. We havealso included a 200-basis-point other specificrisk adjustment for Example Co. to considercustomer concentration risks. The risk-adjustedWACC of Example Co. was estimated at 14.4%,Reprinted with permissions from Business Valuation Resources, LLC6Business Valuation UpdateFebruary 2018Business Valuation Resources

Market Multiple Adjustments: Get A Grip On Grpwhereas the risk-adjusted WACC for FAST wasdetermined to be 9.3%.The risk adjustment to an EBITDA or sales multiple implied by Exhibit 5 is 55%—meaning a 45%reduction in FAST’s EBITDA multiple to equateto the risks of Example Co., due to its smallersize and added concern regarding customerconcentration. This 55% statistic is based on thefollowing computations (which are intended tofocus on risk only and not include any potentialimpacts for growth, which is discussed in a separate section).As shown in Exhibit 6, as the inverse of a “caprate” is a price earnings multiple (PE), we translatethe WACC for Example Co. and the benchmarkcomp, FAST, using the ratio of the implied PE multiple to estimate the risk impact on the EBITDAmultiple. In this calculation, we develop the caprate for each entity based on the inverse of theWACC less g (growth rate). We have assumed a3% growth rate for each entity. The inverse of thecap rate can be compared between Example Co.and FAST to impute a potential market multipleadjustment attributed to risk.Given the inputs for each of FAST and ExampleCo., the estimated cap rates of each are 6.3% andExhibit 5. FAST vs. Example Co.TickerFAST MillionsEnterprise value14,213Market capitalization13,906Terminal growth assumption3.0%Size premium0.6%FAST's WACC9.3%Example Co.'s WACC14.4%Indicated risk adjustment55.1%11.4%, respectively, and the implied PE multipleis 15.9 and 8.8, respectively. The ratio of ExampleCo.’s PE to that of FAST is about 55% (8.8/15.9).Case 2In the second case, shown in Exhibit 7, we assumemore risk is attributed to Example Co. and, usingthe DDM, derive an estimated market multipleadjustment for this perceived risk differential between the benchmark comp, FAST, andsubject Example Co.In this hypothetical case, based on due diligenceconducted, Example Co. has exposure to riskissues in Vietnam, Thailand, Indonesia, the Philippines, and China. Incremental country risk adjustments indicated in the recent Duff & PhelpsInternational Guide to Cost of Capital rangedfrom a low of 3.6% for China to 8.1% for Vietnam.Based on a review of recent sales to end markets,the weighted average country risk adjustmentto the discount rate was 6.0%, resulting in a riskadjusted WACC for Example Co. of 18.0%.As discussed in the prior BVU article,5 it is not uncommon for currency-related risks to equate to50% of the total incremental risk due to operatingin a riskier country. Based on the due diligenceperformed (CCCS framework) in this example, itwas established that Example Co. is fully exposed5See footnote 1.Exhibit 6. Inverse of Cap RateFASTExample Co.WACC9.3%14.4%G3.0%3.0%Capitalization rate (cap rate)6.3%11.4%Inverse of cap rate implied PE15.98.8Ratio of Example Co./FAST55.1% ( 8.8/15.9)Reprinted with permissions from Business Valuation Resources, LLCbvresources.comFebruary 2018Business Valuation Update7

Market Multiple Adjustments: Get A Grip On GrpExhibit 7. More Risk for Example Co.TickerFAST MillionsEnterprise value14,213Market capitalization13,906Terminal growth assumption3.0%Size premium0.6%FAST's WACC9.3%Example Co.'s WACC18.0%Indicated risk adjustment41.9%to foreign currency risk as well as potential defaults from the emerging market customers itsdistributes to. The industry is exposed to bankruptcy issues as well as government policies thatcan undermine the business and its investmentreturn to the holder. There are no indicated offsetting risk mitigation factors, such as sales denominated in U.S. dollars, to offset the perceivedcountry-related risks.For Case 2, the risk adjustment to an EBITDAor sales multiple implied by Exhibit 7 is 41.9%—meaning about a 60% reduc tion in FAST’sEBITDA multiple is warranted to equate to therisks of Example Co., due to its smaller sizeand added concern regarding country/political risks.This adjustment is based on the DDM model asshown in Exhibit 8.Exhibit 8. Adjustment Based on the DDM ModelFASTExample Co.WACC9.3%18.0%G3.0%3.0%Capitalization rate (cap rate)6.3%15.0%Inverse of cap rate implied PE15.96.7Ratio of Example Co./FAST41.9% ( 6.7/15.9)In the above computation, given the inputs foreach of FAST and Example Co., the estimatedcap rates of each are 6.3% and 15.0%, respectively, and the implied PE multiple is 15.9 and 6.7,respectively. The ratio of Example Co.’s PE to thatof FAST is about 42%, or roughly a 60% drop inthe comp FAST’s multiple is reasonable to consider the subject Example Co.’s incremental risk.Profitability (P). As we discussed in the beginning of this article, investors will pay a substantially higher sales multiple when the yield on sales issuperior to other investments, such as observedin the difference in sales multiples betweengrocer Kroger and pharmaceutical firm Pfizer.Similarly, an inferior level of profitability will generally cause a reduction in the selected multiple.To further illustrate how substantial profitability, specifically, EBITDA margins, are to “sales”multiples and valuation of a BEV, Exhibit 9 is anexample of benchmarking two public companies: Watsco Inc. (ticker “WSO”) and Fastenal Co.(ticker “FAST”). Both companies have similar sizein annual sales (about 4.4 billion for estimated2017) and in the same sector (Trading Companies & Distributors, per S&P CIQ). This exampleuses forecasted EBITDA based on S&P CIQ andrelated forecast-based sales multiples.In Exhibit 9, for forecast 2017, WSO’s EBITDAmargins are about 38% of FAST’s EBITDA marginsand WSO’s MVIC-to-sales multiple is 41% ofFAST’s.With the data shown in Exhibit 9, one can observethat there is substantial correlation between theEBITDA margin (the “x” variable in regression)and sales multiple (the “y” variable). FAST’s 2017forecasted EBITDA margins are about 2.6 timesthat of WSO, and, similarly, FAST’s 2017 forecasted sales multiple is about 2.4 times that of WSO.Regression modeling. As mentioned above, for alinear regression equation in a debt-free businessvaluation, EBITDA margins would be the independent (x) variable that serves to explain the behaviorReprinted with permissions from Business Valuation Resources, LLC8Business Valuation UpdateFebruary 2018Business Valuation Resources

Market Multiple Adjustments: Get A Grip On GrpExhibit 9. Influence of ProfitabilityProfitability“P” Profit Margin Example—Focus on Price-to-Sales Multiples and EBITDA Margins( Millions)Forecasted SalesForecasted sco Inc.WSO5,831 4,366 4,586 384 420Fastenal Co.FAST14,2134,3794,7771,0051,093Comparable CompanyUnadjusted Multiples( Millions)MVIC/SalesMVIC/EBITDAComparable Company2017E2018E2017E2018EWatsco Inc.1.34x1.27x15.2x13.9xFastenal Co.3.25x2.98x14.1x13.0xRatio of FAST/WSO in terms of MVIC-to-sales multiples2.43x2.34xPercentage of WSO's MVIC-to-sales multiple to FAST41%43%( Millions)EBITDA MarginComparable Company2017E2018EWatsco Inc.8.8%9.2%Fastenal Co.22.9%22.9%Ratio of FAST/WSO in terms of EBITDA margins (forecast)2.61x2.50xPercentage of WSO’s EBITDA to FAST38%40%of the dependent (y) variable, the sales multiple.As an aside, one can also find a strong correlationand regression analysis in financial institutions thattypically are not valued via a debt-free perspectivebut rather a direct equity technique. As observedon S&P CIQ, these types of firms do not showEBITDA to measure their performance but ratheruse net income. As such, return on equity (ROE)is a key profitability measure for financial institutions such as Morgan Stanley or Citigroup, and, inregression analysis, the independent (x) variableis often ROE and the dependent (y) variable is themarket-to-book-value (MVBV) multiple. Ratherthan value the BEV of such financial firms, typicallythe objective is to value the equity, and a MVBVmultiple is often utilized.Putting it all together. With the above discussion on the elements of GRP, and how one candevelop a benchmark analysis to support quantitative adjustments to market multiples, namelyEBITDA and sales-related multiples, we can nextillustrate how this may be used collectively toprovide support for adjustments to comps’ multiples. In Exhibit 10, the adjustment factors aremultiplicative. Also, all data are hypothetical toillustrate the use of this framework.In the example in Exhibit 5, the unadjusted multiples for forecast 2017 and 2018 for sales andEBITDA were from public comparables (comps).We benchmarked the subject Example Co. to thecomps in terms of growth, risk, and profitability.Reprinted with permissions from Business Valuation Resources, LLCbvresources.comFebruary 2018Business Valuation Update9

Market Multiple Adjustments: Get A Grip On GrpExhibit 10. Influence of Growth DifferentialsUnadjustedMultipleAdjustmentfor RiskAdjustmentfor 0.33x2017E12.1x55.0%75.0%NA5.0x2018 E10.6x55.0%75.0%NA4.4xSalesEBITDABased on the characteristics of Example Co. versusthe comps, Example Co. was viewed as more risky(55% of comps), having lower growth outlook (75%of comps) and lower profitability (70% of comps)as measured by EBITDA margins. For this example,we assume the level of capex spending and networking capital (NWC) investment betweenExample Co. and the comps was not materiallydifferent (meaning EBITDA was viewed as a proxyfor yield on sales, rather than making a further refinement to consider material differences in capexand NWC and how that impacts yi

2 Business Valuation Update February 2018 Business Valuation Resources Market Multiple adjustMents: Get a Grip On Grp Business Valuation Update (ISSN 2472-3657, print; ISSN 2472-3665, online) is published monthly by Business Valuation Resources, LLC, 111 SW Columbia Street, Suite 750, Portland, OR 97201-5814.

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valuation services and terms for the 409a valuation report. Once this is signed and the invoice for the valuation services is settled, we can start running the report. Get your 409A valuation. Running the Report: 10-20 days After the data is provided an

Jun 15, 2016 · The discussions and examples in this Valuation Advisory make specific assumptions for 52 illustrative purposes only. While general principles have been provided for guidance to assist in the 53 valuation of customer-related assets, assumptions used in the valuation of any asset

We will teach 4 valuation methods Trading Comparables Transaction Comparables Sum-of-the-Parts Valuation Discounted Cash Flow Analysis (DCF) 2. Why is Valuation important? . The SCIENCE is performing the valuation, the ART is interpreting the results in order to arrive at the "right"price. TECHNOLOGY can help you do this more efficiently.

Classical Theory and Modern Bureaucracy by Edward C. Page Classical theories of bureaucracy, of which that of Max Weber is the most impressive example, seem to be out of kilter with contemporary accounts of change within the civil service in particular and modern politico-administrative systems more generally. Hierarchy and rule-bound behaviour seem hard to square with an environment .