Monthly Archives: August 2009

Is there any science behind the EBITDA "multiplier" in business valuations?- My Response

Above query the EBITDA multiplier was posted by Steve Swann on Financial Analysts and Modelers group on Linkedin.

I consider it to be very relevant and the responses were equally involving and seemed equivalent to reading several books before being able to comment on applicability of valuation methods. My response to the same is shared below.

Firm valuation should be arrived at using:
a) Discounted Cash Flow method- a must since this is done post a detailed scrutiny of the business model of the firm
b) Estimating cost of capital post factoring the leverage – to be used as discount rate. Cost of capital of similar firms should be calculated; deleveraged and then applied to the firm being valued factoring the firm-specific leverage ratio
c) In case of a listed firm- take a comparable firm approach and use PE and EBITDA multiple as well
d) The valuation figure derived from the above method works as a validation of the arrived valuation figure- variance of more than 20% may need to be explored in detail.

EBITDA multiple is also a useful method when firm is highly leveraged and will be 100% equity-owned post acquisition. So EBITDA multiple has a science behind it.

Role Playing- Will it Work?

While every 2nd article that I read in talks about the business potential from SMB sector in India, I have always doubted if they are managed well. I happen to come across one such firm that not only has the potential to grow from “Small” to “Medium” and “Medium” to “Large” but also took initiatives to action on the same.

The initiatives pertained to formalizing the internal work flow process with key activities listed out, TATs pre-defined and dependencies identified between stakeholders. This was done in expectation of following advantages:
a) Reduced TAT
b) Easy identification of variances
c) Fixation of responsibilities in case of variances
d) Increased scale of operations
e) Easier succession planning

The major drawbacks with the implementation of the whole initiative were:
a) Sequential thinking amongst stakeholders leading to loss of simultaneity in most of the tasks. Ultimately leading to increased TAT.
b) Stakeholders getting risk averse in the sense of non-action until formal mail received. A limiting factor for a small organization.
c) Failure to understand the constraint(s) on part of his/her colleague and hence non-cooperation
d) Inability to appreciate the life cycle of every process created.

Only solution that comes to my mind is “Role Playing”. This is expected to help stakeholders:
a) Appreciate the dependencies of their colleagues on them rather the other way round
b) Learn to know “What to Give” rather than “What to ask for”
c) Bring about a change in mindset towards the initiatives and need for a formalized work flow process.

Independence Day- Stick to the fundamentals

Come independence day and we Indians read (or made to by the media) about what ‘Independence’ means?- Are we independent?; Independence from damn every problem in our lives etc. etc.

Celebrities relate to ‘Independence’ by talking of freeing earth from pollution, women liberation etc. We all, fail to relate to the historical event when India got independent. Since we have not experienced those times we prefer extended definitions of ‘Independence’ that addresses our desires to be free from problems we face today.

I say- STOP IT!

We should all remember to realize that independence in context of WE INDIANS is:

– About the Aug. 15, 1947 when our country was freed from English rule; when the revolution started?; Knowing the freedom fighters;
Educating our young on the relevance of Independence Day.

The issues we face today are common for other countries as well and we have multiple other occasions and forums to talk about them. I desire we spend the day- Aug 15, talking about freedom fighters, revisiting the history of pre-independent India and narrating it to our kids.

Let us stick to the fundamentals- ‘Independence Day’ is Aug 15 1947 and all events related to it.

Love Aaj Kal- A reality

Quite usual to my decision-making style, I instantly decided on reaching home yesterday evening to take my family (Monica, Jassica and Chutki) for watching “Love Aaj Kal” at PVR Saket. It was going to be first movie in theater for my younger daughter (just about completing 4 months on earth). We were quite unsure about how she will react and if the acoustics inside the theater will impact her ears…quite a risk but we seemed more selfish to enjoy it anyways and lets see what happens..

Surprisingly enough my chutki (yet to be named) did not cry for an instant and infact tried urging out of her mother’s laptop towards the screen- very large with human faces for her tiny eyes especially from row “C”.

Concept of “Love Aaj Kal” was quite a common one especially after several movies on similar concept in Bollywood. The key highlighter were dialogues- it seems the Directors (atleast the new generation ones) are fast catching up with the language and mode of conversation of today’s generation. (I reserve my comments on traits of today’s young for later posts on my blog.)

“Love Aaj Kal” in a way highlights the transactions between “Brain” and “Heart” pertaining to a relationship between a boy and a girl. “Brain” is being played by Saif representing younger generation and “Heart” by Rishi Kapoor representing older generation.

As the story unfolds the boy and girl seem to be overwhelmed by their “Hearts” rather than “Brains” which had governed their relationship until they decide to quit (quite an unusual way from old generation perspective). The key message that I interpreted from the movie is that a relationship is not about being practical but about emotions and emotions logically are part of heart and not brain. Talk of practicality hurts me and have decided henceforth to prefer blogging rather than chatting it out with friends except for usual, often concealed, selfish motives and natural human inter-dependence (usse se kaam pad sakta hain).

As per me “being practical” in personal relationship (relationship defined as transactions between 2 individuals only and not each of their transaction with world about their jobs, career, and falaana falaana) is symbolic of expecting more than giving and trying to measure each transaction. Practicality hurts a relationship and makes it very “brainy” and hence no feelings of fulfillment. Infact anybody who is practical is using brains logically striving for his own motives and desires and hence, no feelings of fulfillment leading to unhappiness.

So guys “Love” rules the world- wake up and accept it. Be Practical!

Marketing is subset of Sales?

As per Philip Kotler marketing is defined as “satisfying needs and wants through an exchange process”. As per this definition the word “exchange” indicates “Sales” and even the “Experience” enabled through the sales process. Hence, theoretically “Sales” is an integrated part of “Marketing”.

However, this may not be true in practice, atleast as perceived by me due to following reasons:
a) Marketing & Sales teams operating as separate teams in organizations that I have worked for.
b) Sales teams are focused getting the ROI and looking for marketing team for branding, visibility, demand generation support.
c) Discussion on cost of Sales is the central topic where the Sales gain precedence over marketing due to ease of measurement. This is not to state that marketing returns cannot be measured but that they are not preferred over Sales.
d) ROI is becoming universal measurement tool and which is calculated using only sales and not any other equally measurable tool that may be an outcome of marketing activity.
Being more inclined towards the finance function, I rarely feel connected with the marketing guys. Is it not that marketing is just getting tactical (lacking any strategic direction) enabling sales atleast in case of services?