Hi. I’m valuing a private business consulting firm. I see business consulting firms have a beta lower but close to 1 as their business is somehow cyclical and their financial leverage is minimal. I thought this low beta would reduce their cost of capital and increase their enterprise value, however I see these companies have low EV/Sales (0.5-1.5x) and EV/EBITDA multiples. Why? EBITDA margins are generally good enough to provide solid cash flows, and the low beta should lead to a low WACC.
The problem I’m having is that I’m using the industry’s average unlevered beta and capital structure to calculate my WACC. And with this low WACC that I get, I get a much higher EV/Sales and EV/EBITDA than my peers. I don’t understand… If I’m using their beta, their capital structure and our margins are similar… why are my multiples substantially higher?
Obs: Even if I assume no growth in the cash flow projections, my multiples are still higher than those of the industry. Something’s wrong.
Take a look on this one for instance, CBIZ. Levered beta of ~0.6, EBITDA margin of ~15% and EV/Sales of 1.0x.