If we are analyzing and comparing companies within the same industry, such as Consumer Goods, how does Gross Margin / EBITDA Margin and EBITDA multiple valuation relate to one another and to the industry as a whole?
It is also possible to have a company with higher gross margins (higher aggregate value of the product or higher price point of the product as compared to the mainstream), and still have a similar G&A structure, and still have a higher EBITDA margin. In what way will the relative valuation of a premium segment company in comparison to a commodity product company change? What about applying an ad hoc rules of thumb, such as the following: premium product companies have lower EV/EBITDA multiples because their EBITDA is higher, and so on?
How about comparing and contrasting companies from various industries? Are there any general rules of thumb that can be used to determine this without having specific knowledge of the industry and cost structure?" Quick question: which sector, A or B, will have a higher multiple than the other?
The valuation is based on discounted cash flows, and the multiple is inferred from this calculation. Furthermore, free cash flow should be considered alongside margins because different businesses within the same industry will have different capital expenditure programs and leverage profiles.
When looking at cross-industry comparisons, I would expect an energy company to trade at a significant EBITDA multiple discount to a software company due to (a) high capital expenditure requirements and (b) concerns about long-term cash flow growth.
When looking at EBITDA-based valuations, margins are typically not taken into consideration. What you will see are normalized or adjusted EBITDA values, which are adjusted to take into account operational efficiency gains as a result of the acquisition. You may also need to adjust revenue and cost of goods sold (COGS) for ecommerce businesses in order to account for differences in how shipping is reported. Depending on whether your client charges for shipping and whether the buyer intends to charge for shipping after the purchase (since the trend is toward free shipping), you may have to cut that revenue stream from your bottom line. In the case of COGS, the buyer may have a better shipping network and contracts in place, resulting in an immediate cost synergy.
If we are comparing apples to apples companies, and one of the companies is a premium company and the other is a commodity company, the premium company will almost always have a higher EBITDA multiple than the other. It is because they have established some kind of moat (i.e., competitive advantage) that allows them to capture higher prices and thus, more bottom line value that premium product companies are considered premium. Premium product markets, in contrast to commoditize markets, are typically less saturated and do not experience the same downward pricing pressures as commoditized markets.
This is a difficult question to answer without making a lot of assumptions, but the simplest way to go about it is to consider the potential moats associated with specific industries. The following are some things to consider if you're looking at technology and consumers:
In the end, your "brand" will determine your worth unless you have a proprietary formula or technology, or some other aspect of your business that others cannot duplicate. Most consumer companies sell for 1-2 times their revenue and 8-14 times their EBITDA.
Technology - once again, this is largely dependent on the moats established by the company, but on average, you'll find more tech companies than consumer companies in the market. There are a couple of other considerations, including (a) revenue model (is it licensed or recurring, and how much revenue is generated from services or labor-intensive work (less is better), and (b) whether the product is targeted at consumers or enterprises (this relates to market potential and repeatability of revenue). Technology overhauls in businesses are expensive investments that are generally avoided when at all possible. (See also: Additionally, technology companies typically take longer to achieve profitability and are frequently valued based on revenue or ARR (annual recurring revenue), rather than EBITDA. Top line multiples are more consistent than bottom line multiples because they also experience significant margin expansion as a result of growth. In general, technology multiples outperform those of consumer goods.