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Other Unpublished Work | 1999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

Baker Foundation Professor, Willard Prescott Smith Professor of Corporate Finance, Emeritus

Finance

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Case | HBS Case Collection | August 2016 (Revised November 2019)

Baskits Inc.

Richard S. Ruback and Royce Yudkoff

Soon after Robin Kovitz (MBA 2007) acquired Baskits Inc., the largest gift basket company in Canada, she became convinced that the business needed to make significant operational improvements. In her first year as CEO, she introduced an ERP system to help with sales and purchasing and relocated the business to a more efficient facility. She wondered if she moved too quickly.

Keywords: Production; Supply Chain; Performance Improvement; Consumer Products Industry; Canada;

Citation:
Ruback, Richard S., and Royce Yudkoff. "Baskits Inc." Harvard Business School Case 217-001, August 2016. (Revised November 2019.) View Details

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Case | HBS Case Collection | August 2019 (Revised October 2019)

Systems Design West

Richard Ruback and Royce Yudkoff

Jenn Braus (HBS 2013) was halfway through the 90-day exclusivity period for her proposed acquisition of Systems Design West (SDW). She had completed her business and accounting due diligence. Just as she was about to ask her lawyer to begin drafting the purchase agreement, she received a call from the seller that the company had reached agreement with a large new client that would increase revenue by roughly 20%. The seller asked that the success be reflected in an increased offer price, although he had not specified the amount of the increase.

Braus needed to decide on an appropriate response. Should she stand fast? In her mind, she had already agreed to pay a premium price for SDW, with a higher than typical multiple of EBITDA. Part of her rationale for the high multiple was that she believed the company had significant growth potential. Paying a higher price in response to the new customer seemed like paying twice for the growth. However, because the new customer was so large, Braus imagined that it would nudge the run rate EBITDA for SDW to about $1 million, eliminating a concern she had about the small size of the business. If she decided to negotiate a higher price, how much of an increase was appropriate? Simply applying historical margins would imply that a 20% increase in revenue would correspond to a 20% increase in price. Alternatively, it could be more as margins improved with operating leverage, or it could be less if significant fixed costs were required to on-board the new customer. Additionally, Braus was concerned that a new customer was inherently riskier than SDW’s typical customer that had a history of recurring revenue.

Keywords: Acquisition; Price; Negotiation Offer; Decision Making;

Citation:
Ruback, Richard, and Royce Yudkoff. "Systems Design West." Harvard Business School Case 220-004, August 2019. (Revised October 2019.) View Details

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Case | HBS Case Collection | August 2019 (Revised October 2019)

Helena Divišová

Richard S. Ruback and Royce Yudkoff

Helena Divišová (MBA, 2016) decided to return home to the Czech Republic soon after graduation to be near her father who became seriously ill soon after she started HBS. She had considered leaving HBS immediately to help run his business. But her father, who grew up in the Czech Republic when travel and overseas educational opportunities were severely limited, would not allow her to abandon her studies. Instead, Divišová’s husband, Pavel Diviš, returned to help with the family business while she completed her MBA. She also gave birth to their first child in April, just before graduation. And so, the decision to return to the Czech Republic seemed obvious; her immediate family would be together and she would be able to be with her extended family during her father’s illness.

Keywords: Entrepreneurship; Personal Development and Career; Czech Republic;

Citation:
Ruback, Richard S., and Royce Yudkoff. "Helena Divišová." Harvard Business School Case 220-020, August 2019. (Revised October 2019.) View Details

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Estimating Industry Multiples

Abstract

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