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Equicapita Briefing - What is an EBITDA Multiple

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					                                               What is an EBITDA Multiple and
                                            What Kind Would My Company Warrant

                              WHAT IS AN EBITDA MULTIPLE?
                              This is more complicated than just assuming that the “going rate” multiple is 4 times. Firstly, a multiple is
                              simply the inverse of the rate of return that an investment in a business should return to the shareholders.
                              If the rate of return expectation over the long term is 25%, then 1 divided by 25% equals 4; therefore the
                              multiple is 4x.

                              EBITDA represents cash flow available to all shareholders in the business, most notably, business owners
                              and bankers. Therefore, the multiple on these cash flows should correspond to their respective expected
                              rates of return on the capital that they have invested in the business.

                              A cash flow multiple must be matched appropriately to the “right” income stream. Meaning if you are using a
                              pre-tax income stream the multiple should be based on a pre-tax rate of return. Similarly, if the income stream
                              is available only to the shareholders after paying out all taxes and interest costs, the multiple should be one
                              that includes the rate of return for shareholders on an after tax basis.


                              CALCULATING THE EBITDA MULTIPLE
                              There are several technical components involved in calculating an EBITDA multiple:
                                n   Equity Rate of Return
                                n   Interest Rate on Debt
                                n   Appropriate Capital Structure (percentage of debt and equity or debt to equity ratio)
                                n   Expected sustainable growth rate for EBITDA
                                n   Capital expenditures as a percentage of EBITDA

                              Outlined below is a sample calculation of an EBITDA multiple.

                              Equity rate of return is calculated using a build-up approach, meaning we start with a risk free rate of return
                              (government of Canada bond) of say 5%. To that we add risk premiums, as the risk profile of the investment
                              increases. For example:

                                Risk free rate - long Canada bonds                                                                      5%
                                Add: Public market equity risk premium                                                                  5%
                                Add: Public market small/micro cap size premium                                                         5%
                                Add: Company specific factors                                                                           5%
                                Add: Liquidity premium for privately held equity investment                                             5%
                                After tax rate of return on Equity                                                                    25%
                                Tax rate                                                                                              30%
                                Pre-tax rate of return on Equity                                                                      36%

                                n	 For the interest rate on long term debt we will assume a blended rate of 10% for all long term debt
                                   (conventional term and sub debt).
                                n	 As for the appropriate capital structure we can assume a debt to equity ratio of 1 to 2, which
                                   corresponds to debt of 33% and equity of 66%
                                n	 Expected sustaining growth rate for EBITDA of 5%


What is an EBITDA Multiple and What Kind Would My Company Warrant                                                                               1
                                n	 Capital expenditures as a percentage of EBITDA of 10% - meaning that if EBITDA is $2 million, capital
                                   expenditures to support the growth of 5% (above) is approximately $200,000 per year.

                              Using these components, the EBITDA multiple is calculated as follows:


                                Pre-tax return on equity                                                    C                         36%
                                Debt rate                                                                   D                         10%
                                Growth rate                                                                 G                         -5%
                                Appropriate amount of debt per leverage analysis:                           E                         33%
                                Value of levered equity                                                     F                         67%
                                WACC = ((E/(E+F)*D)+((1-E/(E+F))*C) + G                                  WACC                         22%

                                EBITDA before CAPEX Multiple                                          1/WACC = F                       4.5
                                CAPEX as a % of EBITDA                                                      G                         10%
                                EBITDA multiple - after CAPEX                                 F - G = Net EBITDA Multiple              4.0

                              In summary, the illustration above is the detailed way to determine an EBITDA multiple. When someone tells
                              you they got a 4 x EBITDA for their business, you will understand what it means.


                              WE ARE FREQUENTLY ASKED “WHAT KIND OF EBITDA MULTIPLE WOULD A
                              COMPANY LIKE MINE GET?”
                              Now that the EBITDA multiple mystery is untangled, the more pressing question business owners ask is “What
                              kind of EBITDA multiple would a company like mine get?” EBITDA multiples are often discussed loosely and
                              can depend on what EBITDA is used and how EBITDA is positioned when selling. Is the valuation based on
                              a 12 month trailing basis, weighted average, forecast results, or a combination of historical and forecasted
                              results? Is the working capital surplus included and what other normalizations to EBITDA are reflected?

                              Consider the following example of Zenith Manufacturing with the following EBITDA profile.


                                                                                                                  Trailing 12
                                  Zenith                2009           2010           2011           2012          months        2013 forecast

                                  EBITDA              $1.0 million   $1.2 million   $1.3 million   $1.4 million   $1.5 million     $1.5 million


                              As illustrated in Scenario A, a 4x EBITDA multiple results in dramatically different results depending on what
                              EBITDA is being discussed.



                                 Zenith Manufacturing                                         Scenario A                   Scenario B
                                                                                                  Enterprise          Enterprise   Implied
                                                                      EBITDA           Multiple      Value              Value     Multiple

                                 Simple 4 year Average               $1.2 million        4.0 x     $4.9 million        $5.5 million    4.5 x

                                 Weighted Average                    $1.3 million        4.0 x     $5.2 million        $5.5 million    4.2 x

                                 Most recent fiscal year             $1.4 million        4.0 x     $5.8 million        $5.5 million    3.8 x

                                 Trailing 12 months                  $1.5 million        4.0 x     $6.0 million        $5.5 million    3.7 x

                                 Forecast                            $1.5 million        4.0 x     $6.0 million        $5.5 million    3.7 x


What is an EBITDA Multiple and What Kind Would My Company Warrant                                                                                 2
                              Furthermore, Scenario B shows that the EBITDA multiple can be significantly different when discussing the
                              same purchase price. What level of EBITDA multiple does a business garner in the marketplace when the
                              time comes to sell is based on a number of factors, some of which include:
                                n	 The economic outlook and forecast
                                n	 The quality of the management team
                                n	 The competitiveness of the industry
                                n	 Balance sheet condition
                                n	 Historical growth profile
                                n	 Consistency of track record




                                   ABOUT EQUICAPITA
                                   Equicapita is a private equity fund that acquires established, private, small and medium sized
                                   enterprises (“SMEs”) located primarily in Western Canada. Equicapita's investment drivers are to
                                   acquire operating companies at attractive valuations, with a history of generating sustainable cash
                                   flow and proven management teams. Equicapita believes that there is:
                                    - a generational opportunity to acquire ‘baby boomer’ SMEs; and
                                    - a funding gap in the $2 to $20 million enterprise value range.

                                   The retirement of baby boomer business owners has been described as triggering one of the
                                   biggest transfers of corporate assets on record in Canada. This creates an environment with an
                                   abundance of opportunities to acquire SMEs with long-term operating histories, at attractive cash
                                   flow multiples. Equicapita provides investors with access to this alternative asset class via an
                                   efficient RRSP eligible structure.



                                   DISCLAIMER
                                   The information, opinions, estimates, projections and other materials contained herein are provided as of the
                                   date hereof and are subject to change without notice. Some of the information, opinions, estimates, projections
                                   and other materials contained herein have been obtained from numerous sources and Equicapita and its
                                   affiliates make every effort to ensure that the contents hereof have been compiled or derived from sources
                                   believed to be reliable and to contain information and opinions which are accurate and complete. However,
                                   neither Equicapita nor its affiliates have independently verified or make any representation or warranty, express
                                   or implied, in respect thereof, take no responsibility for any errors and omissions which maybe contained herein
                                   or accept any liability whatsoever for any loss arising from any use of or reliance on the information, opinions,
                                   estimates, projections and other materials contained herein whether relied upon by the recipient or user or
                                   any other third party (including, without limitation, any customer of the recipient or user). Information may be
                                   available to Equicapita and/or its affiliates that is not reflected herein. The information, opinions, estimates,
                                   projections and other materials contained herein are not to be construed as an offer to sell, a solicitation for
                                   or an offer to buy, any products or services referenced herein (including, without limitation, any commodities,
                                   securities or other financial instruments), nor shall such information, opinions, estimates, projections and other
                                   materials be considered as investment advice or as a recommendation to enter into any transaction. Additional
                                   information is available by contacting Equicapita or its relevant affiliate directly.




What is an EBITDA Multiple and What Kind Would My Company Warrant                                                                                       3

				
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Description: Equicapita is a Calgary-based nano-gap private equity fund focusing on acquiring Canadian SMEs that can generate strong, sustainable cash flow from their operations in niche markets. Equicapita generally seeks to acquire businesses: at what it believes are reasonable prices; with a demonstrated history of free cash flow greater than $1 million per annum; with a durable competitive advantage; that operate in industries that Equicapita believes have sound long-term macro prospects; with ongoing participation of senior personnel; with the ability to maintain the cash flow without disproportionate amounts of new capital; where Equicapita can partner with management and align their interest with Equicapita through tools such as earn-outs, vendor take backs and management incentive plans; to be held for the long term; where there is some potential to grow sustainable free cash flow, but where that growth is not essential to generate suitable returns.