Relative Value Concepts Using Multiples

[Relative Value Concepts Using Multiples] The WestTek privately held venture is considering the sale of the venture to an outside buyer. WestTek has net sales = $21.2 million, EBITDA = $11.1 million, net income = $2.9 million, and interest-bearing debt = million. Three publicly-traded comparable firms or competitors in the industry have the following net sales, EBITDA, net income, equity value or market capitalization (stock price times number of shares of common stock outstanding), and interest-bearing debt information:

EASTTEK SOUTHTEK NORTHTEK
Net sales $25,000,000 $37,500,000 $80,000,000
EBITDA $12,500,000 $20,000,000 $37,500,000
Net income $2,500,000 $3,000,000 $10,000,000
Equity value $45,000,000 $60,000,000 $160,000,000
Interest-bearing debt $15,000,000 $20,000,000 $40,000,000
No surplus cash is being held by WestTek or by any of the three comparable firms.
A. Calculate the enterprise value to net sales ratios for each of the three competitors (EastTek, SouthTek, and NorthTek), as well as the average ratio for the competitors.
B. Calculate the enterprise value to EBITDA ratios for each of the three competitors, as well as the average ratio for the competitors.
C. Calculate the equity value or market “cap” to net income ratios for each of the three competitors, as well as the average ratio for the competitors.
D. Estimate the enterprise and equity values for WestTek using the individual net sales multiples from EastTek, SouthTek, and NorthTek, as well as for the average of the three comparable firms. Show the valuation ranges from high to low.
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E. Estimate the enterprise and equity values for WestTek using the individual EBITDA multiples from each comparable firm, as well as the average multiple for the three competitors. Show the valuation ranges from high to low.
F. Estimate the equity values for WestTek using the individual net income multiples from each comparable firm, as well as the average multiple for the three firms.
G. Establish a range of equity value estimates for WestTek based on the highest and lowest overall values generated from the multiples analyses in Parts D, E, and F.
H. From the perspective of the selling venture investors and founders, would you recommend that they negotiate for the final selling price based on the use of top-line valuation multiples (i.e., using net sales) or bottom-line valuation multiples (i.e., using net income)?

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