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Startup valuation according to EBITDA and DCF

Published on: 05/16/2022
By: Erwan Coatnan de Kerdu

Dernière modification le 01/07/2022 à 15:27 par Back Office Update - test



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Startup valuation according to EBITDA and DCF

  by Erwan Coatnoan de Kerdu

The valuation of a startup is not an easy operation. Indeed, it requires the consideration of several elements. It is a dynamic operation based on qualification and confirmation of forecasts in order to measure the capacity to generate Ebitda and thus value.

However, several methods can also be used to value to achieve it.

This is the case of the use of the EBE or the DCF as techniques of valuation of a startup.

By the EBITDA, we mean the Gross Operating Surplus of the Company (GOE). It is in fact the cash flow generated by the main activity of the latter. Therefore, the EBITDA is a unit of measurement of the company’s performance.

Indeed, a positive EBITDA augurs good news for the company. This is because it implies that it is more expensive than its cost of production. When the latter is negative, it means that the company sells for less than its production cost.

It follows, therefore, that EBITDA gives an accurate picture of the company’s situation because its main advantage is that it provides a simple measure of the profitability of an investment. Indeed, when compared with the capital invested, it is possible to make a rapid financial diagnosis of the company.

To calculate EBITDA, three methods can be used.

Firstly, the average EBITDA, which represents the average of the sum of the 3 EBITDAs of the last 3 financial years, without taking into account any weighting linked to the age of the data. This is calculated after reclassifying certain items such as leasing expenses or employee profit-sharing. This is why we speak of the average economic EBITDA.

Following the average EBITDA, comes the weighted EBITDA. Here, we study the average economic EBITDA affected to sector multiples specific to the valuation by EBITDA. It is calculated before any financial restatement to determine the price of the EBITDA.

Finally, we have the restated EBITDA method. It consists of the weighted economic average EBITDA impacted by the financial debt, the net cash and the receivables held by the associates, whether they are natural or legal persons. In fact, it is the latter that allows to determine the value of the company by the EBITDA.

However, the EBITDA does not take into account the financial and exceptional elements of the company as well as the financing and investment policy.

In Anglo-Saxon general accounting, EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is used.

As for DCF (Discounted Cash-Flow), it consists of discounting the cash flows that a company will generate in the future to get an idea of its value.

In concrete terms, it is a valuation method that makes it possible to determine the financial value of a company at a date “t” through the discounted cash flows that it will generate. It is therefore a matter of estimating the future value of the wealth generated by a company at a given time.

All in all, both the EBITDA and the DCF are certainly two methods of valuing a startup, but they all provide a true picture of the company’s situation.

But they still need to be properly applied to the elements of the company that should allow to highlight its value.

Beyond the fact of being able to take note of the state of the financial health of the startup, the evaluation makes it possible to prepare the sale of a startup.

However, it is important not to rely too much on the value of the startup and its price.

The value of an asset is the estimated price made in relation to it, and the price is the value that the asset was worth.

Thus, it is not said that it is because the startup has been evaluated at a certain price that it will necessarily have this one.

Therefore, it is possible to proceed with the sale operation when the market is still favorable in the hope of making a good operation.

The valuation is done by taking into account not only the objective value of the startup, i.e. with reference to its annual accounts and other financial data, but also by taking into account its intangible value, its know-how, performance, clientele as well as its growth potential….

As already noted, the valuation can be done according to several methods such as the DCF method or the EBITDA.

The purpose being to facilitate the sale or the transmission of the company.

Also, since 2018, it is possible to proceed to the valuation of its startup following the recommendations of the IPEV.

Indeed, in this rather delicate context where the need is imposed for the companies to re-examine their internal governance as well as their methods of valuation in order to ensure their alignment with the best practices, the IPEV made recommendations contained in its last guide to their destination. This guide is available since early 2019. It should be recalled that the IPEV serves as a reference for the evaluation of the entire industry in France but also throughout Europe.

In this latest guide, the most important impact is undoubtedly the disappearance of the so-called “Price of Recent Investment” technique, which was used by many players to value by default, and sometimes over a long period of time, investments at their acquisition cost. This disappearance complicates the situation for management companies investing in young companies (seed, start-up, venture early stage) for which the acquisition cost is an important reference.

However, the IPEV guide now recommends the implementation of specific techniques for this type of investment, some of which are relatively sophisticated, in particular the weighted scenario approach, the option approach and the hybrid approach.

However, it also emphasizes the coherence of the techniques applied in the framework of the evaluation, without forgetting to take into account the specificity of the company being evaluated.

As a consequence, wanting to proceed with the evaluation according to the same technique used by others, can only constitute an error of appreciation since the situations of the companies are different. Not only do they not necessarily operate in the same sector, they are not the same size and rarely face the same difficulties.


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