Could also be a big tax asset to pay for…assuming negative EBITDA has equated to losses (sounds like it here with a positive net income…but could be other reasons) for tax purposes. So could be value in that.
There won’t be much value in the NOL after the aquisition without some seriously creative accounting.
Dude, just run a dcf.
In regards to a multiple, assuming EBITDA is still negative after your adjustments, work your way up the income statement. You can run comps and get multiple off of gross profit, net fixed assets, revenue, net working capital… Be sure to compare the company’s numbers to the industry to make sure they are in line.
Poop - in a generic sense why would you say you would need some creative accounting to get value from an NOL (I was responding to the original poster so maybe i missed some specific details)? In my experience the big challenge on the NOL front and getting value comes if you are acquiring into a different country (since they you cant do much in terms of combining the legal entity structure and often times it is hard to get hte income moved over).
Just curious if I took your comment wrong (since we are talking generically…why would it take creative accounting?).
I’ve run into this a couple times, and it’s usually caused by the owner running a bunch of expenses through the business to avoid paying taxes. It can be pretty tough to quantify those expenses, but you can get to them if the seller is transparent enough. As a starting point, I would usually ask them (1) which family members are on the payroll, how much they’re paid, and what they’re doing and (2) what expenses would go away if you were to buy the business.
On the second question, they may give you a laundry list of expenses that may or may not be real. However, within that laundry list are the items that you’re looking for. You’re looking for things like paying the groundskeeper $10k to mow the 200 sq ft front lawn twice a month.
^^
Seems like the type of shit that would happen in very small companies that don’t get their financials audited.
I personally would never invest in one of those.
CFAvMBA, be happy, your situation isn’t as bad as mine. You are buying. I currently have to sell securities of a company with negative EBITDA
You could also look at a EBITDA from a run rate standpoint. When a company has a product with recurring revenue, they have non-capex upfront costs that flow throug hte p&l (commissions, installations, etc). Since those costs won’t recur, the run-rate EBITDA is usually significantly higher than what’s reported.
So, depending on the business model, maybe you can separate the existing assets that you’re buying (the part that makes money) and the rest of the business (the part that loses money). If you bought the assets and didn’t continue to reinvest, what’s the run-rate EBITDA that you’re buying? Try throwing a multiple on that.
I’ll preface this post by saying I have absolutely no clue what I’m talking about (really about anything in life in general but more specifically, this topic).
26 U.S. Code § 382 - Limitation on net operating loss carryforwards and certain built-in losses following ownership change
Obviously your company believes things will improve in your hands.
You could run a regression on comps and try to find how the assumptions your company has for the firm would be valued in the current market.
So you take EV/EBITDA drivers for your comps (tax rates, depreciation, reinvestment, cost of capital and expected growth), do a regression on them all and find what’s the equation that is pricing those multiples. It will look something like:
0.23 - 2.14 Tax rate + 8.76 expected growth yadda yadda…
Then you plug your best assumptions in that regression.
R^2 won’t be pretty, those kind of regressions change all the time, market may be overvalued, etc… But if you have negative EBITDA that may at least give you an extra tool. It may also help in negotiations, since you breaking down the drivers can help you argue on how the sellers’ EBITDA multiple is random and unfair.
Or you could use the assumptions to restate the income statement as if your company were in control. Then you do your EV/restated EBITDA.
This is getting closer and closer to a DCF, but you can’t really do much else. Maybe EV/EBITDA on year 5 or something, but then you gotta adjust your comps.
I’m assuming EV/S is out of the question.
If you’re gonna sell stuff, then EBIT/FCFF tends to be higher (negative reinvestments). That’s kinda ugly though, since you can’t really assume negative reinvestments forever, unless you want to milk the company into the ground
I like this. Next time I’m analyzing multiples, I’ll try this out.
Well, I am certainly not a tax expert either, but one way you can pretty easily start taking advantage of the NOLs is just invoicing through the new corp wiht hte losses. If I have US entity A and then we buy US entity B (assume two separate legal entities that then roll into maybe some other holdco), if A previously had no losses, there isnt a lot to stop me from just selling to B and then to the end customer. This gets harder if you are talking about different countries, etc. You can also do some things like mgmt fees, IT charges, RD charges, etc, but those are much smaller (I am speaking more from a manufacturing environment than service environment). Also, these types of charges and the overall effectiveness is really dependent on the country as well (many countries have withholding taxes that basically make it just another way to move cash, but not save on taxes).
Given negative EBITDA, shouldn’t you just buy it for a buck and put in clause that says you’ll pay the shareholders xyz after 5yrs if the business is still performing.
I would also assume there would be a clause which states you will keep a percentage of employees.
I like earn outs – but only when I’m buying, never when I’m selling.
Expect lower offers if you’re only willing to consider all cash.
Two points I suppose -
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If they’re negative earnings/CF then th value of the company should be the higher of a transaction-based and asset based approach. (I.e FV of net assets). Also, why not just buy the assets?
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Assuming you can absorb them well, you’ll be able to normalize payroll expenses pretty heavily, S&M, G&A.