The Daily Technical #24: Could you explain the concept of present value and how it relates to company valuations?

Good morning. Welcome to the 24th edition of The Daily Technical. You’re here for one reason so let’s dive in.

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OVERVIEW OF YESTERDAY’S QUESTION
What are the main levers in an LBO that drive returns?

You need to focus on three key components: Debt Paydown, EBITDA Growth, and Multiple Expansion. Here's the breakdown:

Debt Paydown (Deleveraging): Paying down debt enhances equity value. For example, if the company uses its cash flow to pay down principal over time, the equity stake increases as the debt decreases.

EBITDA Growth: This can be driven by strategies like operational improvements through cost-cutting or price adjustments, launching growth initiatives, and executing accretive acquisitions.

Multiple Expansion: There’s potential for selling at a higher multiple than the purchase. Factors that could lead to multiple expansion could be an improved economic climate or increased company value due to strategic initiatives.

Common Mistakes

1. Students often forget to connect how paying down debt enhances equity returns. Always circle back to the idea of deleveraging as a foundational component of value creation in an LBO.

2. It's common to skip detailing how EBITDA growth is achieved. Prevent this mistake by illustrating at least two methods of achieving EBITDA growth, such as cutting unnecessary costs or expanding market reach.

3. Students might forget to consider external factors influencing exit multiples. Remember to discuss external economic or market conditions that could affect multiple expansion, and provide a brief explanation.

Key Takeaways / TLDR

• Focus on three key components: Debt Paydown, EBITDA Growth, and Multiple Expansion 

• Paying down debt boosts equity returns by leveraging the company's free cash flows.

• Illustrate EBITDA growth through practical enhancements and strategic acquisitions.

• Explain multiple expansion by considering both internal improvements and external market conditions.

TODAY’S QUESTION
Could you explain the concept of present value and how it relates to company valuations?

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