Risk ON & Valuations
May 10, 2022
by a searcher from University of New England in Sydney NSW, Australia
Hi guys/girls,
Looking for feedback on how and if some you are modeling in the current risk profiles that are clear and present and also looming larger on the economic/geopolitical horizon with deal valuations.
I have two deals in DD currently, one collecting some age given the COVID interruptions and a cycle peak and another more recent deal. What are those of you in DD recalibrating for and to in your valuation modeling at present for the risks alone on current EBITDAs?
from The Tulane University of New Orleans in Miami, FL, USA
If you're worried about inflation, the price of the good or service you're purchasing should be scalable in line with your expenses, with the exception of the cost of energy and real estate, whose prices are advancing faster than the rest of the economy. If real estate & gas or oil are major costs in the business you're looking at, the cost risk can be mitigated by looking for seller's with long-term leases and buying call options on long-term oil contracts.
If you want to model a recession case, I would take a conservative 30% off of the top line numbers for the first 2 years of your ownership IF the business is in an industry tied to discretionary income. If you're really concerned about recession then it might be best to avoid those discretionary income based industries entirely unless you can find a sweetheart deal.
from INSEAD in London, UK
However, given the right right company in the right industry it's worth noting that interest rates are still very low - and if one could price through inflation while keeping costs in check - a new environment could actually benefit your business case at the current valuation.