Consulting Spotlight: Valuation
EBITDA is the most common valuation metric in M&A, but I agree with Warren Buffett – “When CEOs tout EBITDA as a valuation guide, wire them up for a polygraph test.”
The single most stable valuation metric in the AEC industry is net service revenue (NSR). A more nuanced formula, however, is my preference. We use our Z-Value inputs from our annual Valuation Survey, with M&A multiples, and do so on a weighted average basis. This approach allows us to capture a more comprehensive perspective by including income statement metrics (NSR and EBITDA) and balance sheet metrics (book value and interest-bearing debt), plus backlog and staff size. I emphasize backlog when I review firms, and note that this multiple drives enterprise value in an external sale more than any other single metric – more than EBITDA, even.
After doing all that analysis, though, we have to step back and think about what all of these valuation formulas lack. Not one of these metrics captures important characteristics that have to be considered, like brand value, location, A/R health, management succession/bench strength, or the presence of a culture that will foster retention of talent post closing. Formulas are critical, but understand the limits and trust the “gut checks” too.
The importance of EBITDA cannot be understated. It is the most commonly-used metric. However, it is one metric in a sea of many, and I remain of the belief that a formula gives us a more “holistic” perspective than EBITDA alone.
Zweig Group’s Valuation Survey can help test the logic of your current model and see what the drivers look like as the industry evolves.
Zweig Group has completed more valuations in the industry than any other firm. We have a highly credentialed appraisal team that understands the value drivers. Zweig Group performs valuations for a range of purposes including ownership transition planning, corporate planning, ESOPs, transactions and litigation.