Appropriate and approximate discount rates in buyouts:
- near liquidity – 30%;
- strong cash flow history – 25%;
- growth platform – 20%
In the buyout modeling changing management assumptions is common. Among the most routine changes are:
- adjustment of the growth in sales, gross margins;
- detailed examination of the SG&A;
- adjustment of capex to at least the level of depreciation;
- projections must run at least until the steady state
In determining the valuation in a buyout we look at the industry and comparable size market purchase multiples. The most common is EBITDA multiple, however, it might not be relevant for a company that is not currently generating high profits.
In a buyout the private equity firm has greater control of the timing of exit and the exit multiple than in the VC deal.
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