Page 42 - Bankruptcy and Reorganization Services

between the guideline and subject company. Adjustments are typically used to account for differences in
size, growth, profitability, and other factors between the subject company and the selected guideline
companies. Finally, the adjusted multiples are applied to the relevant financial metric of the subject
company to obtain an initial indication of the subject company’s value.

Commonly used comparative multiples include the following:

 Market value of equity (MVE) / net income

 MVE / book value of equity

 Market value of invested capital (MVIC) / earnings before interest and tax (EBIT)

 MVIC / earnings before interest, tax, depreciation, and amortization (EBITDA)

 MVIC / revenues

 MVIC / debt-free cash flow

 MVIC/ book value of assets

It is important to match the numerator and denominator of these multiples correctly. Equity numerators,
such as MVE, should be matched with denominators that are equity based or reflective of cash flows to
holders of equity. Invested capital numerators, such as MVIC, should be matched with cash flows avail-
able to holders of debt and equity or asset-based denominators, such as EBITDA, assets, or tangible in-
vested capital.

The steps in applying the guideline company method include but are not limited to the following:

1. Identify and select guideline companies.

2. Normalize financial statements.

3. Perform comparative financial analysis.

4. Calculate guideline company multiples.

5. Adjust the calculated multiples for material differences between the subject company and the se-
lected guideline companies.

6. Select and apply multiples to the relevant financial metric of the subject company.

7. Synthesize and weight indicated values.

8. Adjust the computed value for ownership characteristics such as marketability and control (level
of value).

9. Adjust for nonoperating assets and liabilities.

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