I have been taught that PE firms use EBITDA multiple for the purchase price and exit price, sometimes working back from the targeted IRR.
Is it possible for PE folks to look at other multiples such as EBIT if the target is capital-intensive? I know P/E does not make much sense b/c you will replace the financial structure and E is distorted by the current structure.
Many thanks.
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For valuation purposes or benchmarking, you can look at other multiples as well (ev/rev, ev/evitda-capex, ev/ebit, p/e in particular cases, ev/nopat), it depends on the value drivers of the business
For transaction returns purposes you generally assume EV/EBITDA as an entry multiple, unless you are looking at a financial services business (bank or a financial holdco) where you can use P/E or P/B
EBIT or EBITDA - Capex is very normal for industrial companies with high capital intensity and where tangible assets are key to have a product you can sell.
Lease-adj. EV/EBITDAR is also very much used in industries where Real Estate ownership can drastically change the company's financials (e.g. HC Facilities).
EV/EBITDA is certainly the industry standard when comparing across industries / entire portfolios, and for most industries.
EV/FCF is also a metric that many investment committees will look at, but it requires more data, more calculations, a clear definition of what you include/exclude from FCF, etc, and therefore (while arguably more important) it is never the "main" reference multiple.
A lot depends on the partner and the committee background and investing style as well. You always go to a committee with one page having pretty much every multiple you can think of, and try to flag the positive ones and discuss the negative ones (e.g. "We are paying 6x EBITDA" "Yes, but why are we paying 12x EBIT?" "Because the asset is being depreciated is over 20 years but based on XYZ we know average useful life is twice as much, and if you look at the "FCF Yield" over the BP, we are actually ....) .
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