Share valuation - do you deduct borrowings

Enterprise value

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I have seen a valuation completed by another accountant for share valuation purposes.

The value of the company was valued using EBITA - and then the Valuer made a deduction for the invoice discounting liability.

This was on the grounds - the liability would have to be settled once the business was sold.

But. if the trade was sold, the shareholder would either sell the assets AND liabilities, or they would retain them. Either way I am confused as to why the invoice discounting liability was deducted, but no other adjustments.

what are other people's thoughts?

 

Replies (7)

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By mrme89
20th Oct 2016 20:43

Was the invoice discounting personally guaranteed, and therefore needs to be settled pre-sale?

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By eastangliantaxadvisor
20th Oct 2016 20:56

Maybe - that would follow!

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By mrme89
20th Oct 2016 21:08

I know of a very good broker that might be able to arrange for the discounting to be taken on by another firm, and the guarantee to be transferred to the new owner if needs be.

PM if this would be of help to the purchaser.

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By johngroganjga
20th Oct 2016 22:19

It's quite simple - interest bearing debt has to be deducted from an EBIT or EBITDA valuation because otherwise it would not be taken into account at all. BI - before interest is the key.

It's nothing to do with whether it has to be settled before the business can be sold.

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By eastangliantaxadvisor
20th Oct 2016 23:01

But surely thats why the EBITA multiple would be lower then the p/e ratio

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Replying to eastangliantaxadvisor:
By johngroganjga
21st Oct 2016 07:56

.

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Replying to eastangliantaxadvisor:
By johngroganjga
21st Oct 2016 07:56

Yes of course it's lower than the P/E ratio, because the latter is applied to the smallest profit figure - profit after everything.

To put what I said another way, an EBIT valuation gives you the enterprise value, which is the notional value of a company on a debt free cash free basis. To get the actual value you have to deduct any debt and add any surplus cash.

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