Negative EBITDA and Multiple

What, if any, adjustments would you take when looking at an acquisition when the EBITDA is negative? NI is positive through some one time gains.

Is there a reason you are using EBITDA and not true free cash flow? I don’t work in the field but I always assumed EBITDA is used when you don’t have the financials to do a true cash flow in terms of analysis. In terms of value it seems people use EBITDA, but I’d imagine calculating the cash flow gives a much clearer picture of what is going on.

Need to figure out which expenses were realized in the future but are unlikely to recur. For example, if a company has been going through a multi-quarter restructuring – such as an overhaul of facilities, roll-out of a new point of sale system and internet, or whatever else – then some of the expenses are likely to be realized above the line in the past and temporarily depress EBITDA, but may not recur at same level in the future. In that case you would also want to use a forward EBITDA multiple rather than LTM if your view is that the company will be at a different steady state in the future.

I should add this is a private company we are targeting for an acquisition.

Time for adjusted EBITDA, adding back items that we will not assume if we take it over. I suppose we could use a multiple of sales, but that’s not too reasonable in this case.

We also don’t do true cash flow analysis in this space. We use an industry multiple. It’s how it is in this space.

What are you using for a private company/liquidity discount?

^ The model I am using does not have it. We’re looking to acquire a business to add some synergies to our existing good and service line in that area. Perhaps I could improve the model some.

What else should I be doing in this case?

The sellers in this case have an EBITDA and EBITDA multiple in mind as jusitification for their sale price. We are not using a DCF valuation for whatever reason. I’m miffed at this too.

Multiple on EBITDA is pretty usual as a metric.

I have to admit I am pretty clueless on what to do when EBITDA is negative though…

It means the seller pays you!

Seems to me that if there is negative EBITDA, then there better be 1) some big one-time costs (that you take out and restate EBITDA, either without them, or amortized, whichever seems most appropriate), 2) a boatload of expected growth, or 3) (related) some pretty awesome synergy, perhaps because you’ve eliminated a competitor and can price upwards. Or some combination of the three.

Perhaps a multiple method is not a useful valuation method in this situation?

^ It’s what I’m tasked to do. Bchad nailed some of it. The owner is under distress and we’re looking to swoop in like a vulture and pick up their venture.

Agreed. If you’re already losing money before you trick the dumb auditor, then I’d wonder what value the company really has to offer you.


Is modeling a DCF out of the question? It seems to handle the situation well, as well as pricing in some senstivity analysis of the assumptions.

Perhaps consider looking at future EBITDA (when it’s forecast to become positive) , then discounting that back and using an industry multiple. At that point you might as well do a DCF, but I don’t see any value at all in attaching a comparative multiple to a negative number.

Just take the absolute value???

^ I’m pretty sure that’s how Facebook valued WhatsApp.