Inflationary Pressure and its impact on valuations?

by a searcher

1 year ago

Would welcome any insights on how inflationary headwinds and rising rates should impact valuations/multiples for deals under LOI or those being negotiated. For example, if you have a deal under LOI at 5x, should you immediately go to the seller and request a different valuation ….say, 4.7x or 4.5x due to the cost of money or uncertainty of future rates? I look forward to hearing your thoughts?

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searcher from University of Rousse

Yes, but usually sellers are more cautious... it may take 2x the effort now, than what it was before.

1 year ago | like reply | 0 likes

searcher from McMaster University - DeGroote School of Business

My suggestion is to run the DCF on your specific deal. For stuff I'm looking at where EBITDA margin is >20%, FCF is 80%+, leverage is 2.5 turns, the difference between paying 5 versus 4.5x doesn't have a material impact on our model so we can generally bridge a 0.5x gap. However, with lower margins or FCF and higher leverage, it may have an impact on returns. Hope that helps.

1 year ago | like reply | 0 likes

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