Estimating Industry Multiples

Malcolm  Baker; R. S. Ruback

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Other Unpublished Work | 1999

Estimating Industry Multiples

by Malcolm Baker and R. S. Ruback

Abstract

We analyze industry multiples for the S&P 500 in 1995. We use Gibbs sampling to estimate simultaneously the error specification and small sample minimum variance multiples for 22 industries. In addition, we consider the performance of four common multiples: the simple mean, the harmonic mean, the value-weighted mean, and the median. The harmonic mean is a close approximation to the Gibbs minimum variance estimates. Finally, we show that EBITDA is a better single basis of substitutability than EBIT or revenue in the industries that we examine.

Keywords: Management Analysis, Tools, and Techniques; Performance; Mathematical Methods;

Language: English

Format: Print

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Citation:

Baker, Malcolm, and R. S. Ruback. "Estimating Industry Multiples." 1999.

About the Authors

Malcolm P. Baker

Robert G. Kirby Professor of Business Administration

Finance

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Richard S. Ruback

Willard Prescott Smith Professor of Corporate Finance

Finance

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Supplement | HBS Case Collection | March 2019

Baskits

Richard S. Ruback and Royce Yudkoff

Citation:
Ruback, Richard S., and Royce Yudkoff. "Baskits." Harvard Business School Multimedia/Video Supplement 219-709, March 2019. View Details

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Casebook | 2019

Private Equity: A Casebook

Paul A. Gompers, Victoria Ivashina and Richard S. Ruback

This book is a collection of cases and notes that have been used in Private Equity Finance, an advanced corporate finance course offered in the second year of the Harvard Business School’s MBA curriculum, over several years. Our goal is to provide detailed insight into the sources of value creation as well as outline the process of deal making in the private equity industry.

Keywords: Private Equity; Value Creation; Cases;

Citation:
Gompers, Paul A., Victoria Ivashina, and Richard S. Ruback. Private Equity: A Casebook. London: Anthem Press, 2019. View Details

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Teaching Note | HBS Case Collection | May 2018 (Revised February 2019)

Greg Mazur and the Purchase of Great Eastern Premium Pet Foods

Richard S. Ruback, Royce Yudkoff and Ahron Rosenfeld

Teaching Note for HBS No. 211-085. Greg Mazur (HBS 1997) identified a small firm, Great Eastern Premium Pet Food, in December of 1998 that fit his search criteria and decided to offer the seller a cash price of $1.2 million plus an earn-out equal to 1% of revenue over the next five years. He planned to invest $500,000 of his own money in the acquisition and finance the remainder with a senior loan in a formal letter of intent.
Great Eastern Premium Pet Food was a regional distributer of pet food products that operated in a highly competitive environment, with low profit margins, and no exclusive products. Great Eastern was barely profitable in 1997 and had profits of about $140,000 in 1998. Mazur evaluated the acquisition using a financial model that assumed a sales growth rate of 12.5% per year, and a gradual improvement in profit margin from 2% to 7.5% over five years. He identified ways to grow sales through changes in the composition and structure of the sales force and to improve margins through managing costs. The case explores the rationale for the acquisition and its evaluation, including the reasonableness of the financial model and its sensitivity to alternative assumptions.

Keywords: Acquisition; Entrepreneurship; Financing and Loans; Negotiation Deal; Strategic Planning; Valuation; Analysis;

Citation:
Ruback, Richard S., Royce Yudkoff, and Ahron Rosenfeld. "Greg Mazur and the Purchase of Great Eastern Premium Pet Foods." Harvard Business School Teaching Note 218-122, May 2018. (Revised February 2019.) View Details

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Estimating Industry Multiples

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