EV to Revenue Multiple - Investment Banking Interview Qs

In this video, we cover the EV / Revenue multiple, which is typically the best Valuation Multiple for a start-up business. Finance students often learn a variety of approaches to multiple-based valuation, but don't know when to apply particular multiples. In our explanation, we use the industry lifecycle to frame when we should use particular multiples.
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Learn how to answer interview questions from a former Investment Banking (UBS LA), Private Equity (Golden Gate Capital + HIG Capital) and Investment Management ($200B Mutual Fund / $2B Hedge Fund) practitioner…and Adjunct Professor in Columbia Business School’s Value Investing Program who has trained thousands of current IB/PE/HF/MF professionals.
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Contents:
00:00 - Intro
00:08 - Video Context & Overview for EV / Revenue Multiples
00:23 - Concept Review
00:24 - The Industry Lifecycle Framework
01:06 - Early vs Mid vs Late-Stage
01:52 - Early Stage Multiples (EV / Revenue)
02:47 - Mid-Stage Multiples (EV / Revenue or EV / EBITDA)
03:30 - Late-Stage Multiples (EV / EBITDA)
04:19 - Concept Recap
04:54 - Wrap-Up
Hope this is helpful and let us know if you have any questions in the comment section below.
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[@quintondouse7237]

Hey Mike, great video. Quick question for you regarding the specific multiple you'd chose for LBO entry valuation. During valuation exercises, you're calcuating the max, min, different quartiles and the median multiples. When we're actually calculating a value for the select business, what multiple should we use? Should it be the median? I am going through PE recruiting and was wondering when given a comps table output for a case study, whether using Median is always the most justifiable? Essentially, how should we be thinking about calculating or identifying the entry / exit multiple?

[@FinanceableTraining]

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[@jiangsongqing]

Have you tried adjusting EV/NTM Sales with growth rate for a more apple to apple comparison? I've seen ppl using EV/NTM Sales/Growth, kinda similar to PEG.

[@FinanceableTraining]

Hi Songqing Jiang! The short answer is that I haven't seen that very often. It's a good idea to conceptualize EV/Revenue multiples in the context of the growth trajectory of the business for sure. But if you think about why we create multiples in the first place, it's really to have a quick rule of thumb (heuristic) that people can anchor to. For example, most sell-side/buy-side folks have an intuitive grasp for Levered/Unlevered multiple ranges for their coverage areas which makes them useful in communications across deal/investment teams. The problem with (EV/Rev)/Growth...and PEG Ratios (PE/Growth)...is that they aren't as common and even though well-intended, often become controversial because people don't know how to interpret them. So, I guess the short answer is that if your group/firm uses these multiples regularly, then I'd go ahead with it, but if not, it's likely to lead to confusion. Hopefully that helps.

[@jiangsongqing]

@@FinanceableTraining thx Mike!

[@sriram181]

3:10 When you say profits aren't normalised do you mean that it is not normal to witness profits during those years or accounting periods ; Or, do you intend to refer to the Normal profit in Economics (which is essentially just the break-even point)?

[@FinanceableTraining]

Hey @sriram181, recorded a quick video for you here: www.loom.com/share/0621fe05820549b4ab0ab638e68a6f5f?sid=4be5e736-9123-4ef2-b8a0-f736ab000894

[@VathanaPoev]

Will the multiple vary for different industries? Thanks!

[@FinanceableTraining]

That's right. It will generally be different by industry.

[@KJ-rk1nh]

Fantastic

[@FinanceableTraining]

Glad it was helpful!

[@faiden1273]

You just can't use this ratio for startups in relatively new industries because there are basically little to no competitors to compare to. Or if there are, some of them may not publish annual reports, or you may not just be able to find the amount of shares they currently have.

[@faiden1273]

Its much easier to use Price to Revenue ratio because up to date valuations can be found with some effort

[@FinanceableTraining]

Hey Faiden! Thanks so much for responding here. You actually can use this for start-ups in new industries. And it's one of the most common metrics for early-stage businesses. Even without a direct competitor, and EV/Revenue multiple of a company that's in a different industry, but with similar growth characteristics and capital intensity can be useful. You are correct in that some of the info is hard to find. So it's a bit of a scavenger hunt. But you don't need the share count. Just the total purchase price (or Enterprise Value). Lastly, I think there's a little bit of a disconnect here. If by Price to Revenue you mean Purchase Price of the business, then that 'Price' is actually the Enterprise Value (or EV). If however, by Price you mean Market Cap, that's also a metric that you'll see sometimes (which often isn't wildly different), but for that calculation, you'd actually need the share count to calculate that. Happy to chat further. Hit me up on LinkedIn if you'd like to: www.linkedin.com/in/mikekimpel/ Hope this helps sir!

[@faiden1273]

@@FinanceableTraining haha yes, I misunderstood something. By price I meant valuation (basically enterprise value in other words for startups).

[@FinanceableTraining]

@@faiden1273 No worries at all. Love to see your passion for learning this stuff! Hit me up on LinkedIn if you'd like to join our platform. Teaching a bunch of free classes on everything from Financial Modeling to Valuation. Happy to add you.

[@reaganernst3868]

So why is EV/Revenue valid, wouldn't that just indicate the same thing as EBITDA because revenues are not normalized

[@FinanceableTraining]

Hey Reagan! I wouldn't say that EV/Revenue is 'valid' or 'invalid' necessarily. It's more of when it's useful for analysis purposes. For a company that has no EBITDA, it would clearly be more useful because you need a positive number for the multiple to be meaningful. When you're dealing with companies that aren't mature, their margins tend not to be reflective of a mature business (because they haven't grown into their cost base) and as a result they tend to bounce and vary quite a but from company to company, so the multiples are less useful/meaningful as a result. Does that make sense? Happy to further elaborate if it's helpful...and thanks for the question!