You are going to analyze ABC company using a DCF and EBITDA multiples, based on

Question

You are going to analyze ABC company using a DCF and EBITDA multiples, based on a minority view. The company is publically- traded and you might buy some shares if you think is it undervalued. You notice that the owner pays herself $4 million/ year although the competitive amount would be $500 thou. Another analyst is preparing an analysis for a takeover bid of ABC on a control basis. How should each analyst treat the owner’s salary?

Adjust the salary down to $500 thou for each analysis

B. Adjust the salary down only for the control case

C. Do not adjust the salary in any case; it reflects actual results

D. Best to use a revenue multiple only in your work to avoid this issue

Explanation / Answer

Answer

B. Adjust the salary down only for the control case

When you are valuing company from minority view to earn dividend or capital appreciation, Actual salary and competitive salary of owner is irrelevant. So no adjustment is tobe done while valuing company from minority point of view ( by both method DCF or EBITDA multiples).

When you are valuing company for controlling stake, you can influence all management & operational decisions including owner

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