WWII 057: Private Market Valuation with the EBITDA Valuation Method, Investing for the Short-term, Old Money Families

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Main Topic: Private Market Valuation using the EBITDA Valuation Method

Private Market Valuation (“PMV”) is the process of determining how much you would pay for an entire company by applying industry normalized valuation metrics to the company.

There are no short-cuts and completing a rational private market valuation is not a simple plug and play process.

In the world of private equity, most valuations are measured in multiples of EBITDA, or Earnings Before Interest, Taxes, Depreciation, and Amortization. This profit and loss statement based metric purports to estimate the unlevered cash flow of the company, and you would pay some multiple of it, such as eight times or ten times EBITDA,.

To reach a total enterprise value, you would come up with the multiple you want pay and complete the formula Enterprise Value = Multiple * EBITDA.

The formula to value equity using the EBITDA valuation method is:

Equity Value = Enterprise Value – Total Debt – Cash and Cash Equivalent

You will come across EBITDA often when investing and it’s important to understand the good, the bad, and the ugly about EBITDA based valuation.

Be sure to read this extensive post I did on the topic of private market valuation using the EBITDA multiple method including an example using Disney ($DIS).

People want to send me books with EBITDA and I say fine, as long as you pay cap ex. There are very few businesses that can spend a lot less than depreciation and maintain the health of the business.”

Warren Buffett
Berkshire Hathaway

Ask JB: How should I invest $50k for the short term? How can my family become Old Money?

Leveraging 50k..no risk ideas? Limited time frame.. (self.personalfinance)

submitted 19 minutes ago by GiveChubsAHand

Have 50k earmarked for a project which cannot commence for a month or two. Limited income etc.. Thoughts on how to generate short term $ without risking the 50?

JB Says: You can put it into a CD which will be FDIC insured and make some interest. Otherwise keep it in bank account. Never put money into the stock market with such a short horizon as six months.

Becoming Old Money (self.investing_discussion)

submitted 4 hours ago by woook3r

I wanted to talk to someone about Old Money and what it would take for me to help my descendants become Old Money.

Basically, the idea is to invest a portion of my income that will not end up in in my retirement. An inheritance, in other words, but not an inheritance that is to be consumed by personal expenditures. When my grandmother died, my father spent his inheritance on an in-ground pool and that was the end of it. While we enjoyed that pool, we no longer live in that house and so now nothing comes of that inheritance.

Over time, continued reinvestment yields exponential growth. Isn't that right? That means that if my children carry this on and continue the pattern of investment, then the income from our investments alone will rival the income of any individual earner and one day will surpass it.

This is what I want for my family. I think that we will waste our potential otherwise. My father's IQ was measured at 145, my sisters at 138, and mine at 135. I think we all have great potential to make society a better place and I think that our descendants will, too. However, its hard to think big and take risks when you have to put food on the table. You have to feel big to think big, I think. Unless you are crazy, you wont feel big unless you actually are big. Anyway, thats my line of thinking. I need to make my family bigger, but not by populating it, haha. That happens naturally, I think. I want to empower the individuals and that takes effort.

Anyway, I want to open this discussion up freely. Anyone can post any idea towards accomplishing my goal. However, I think there are two main things that I need: A sound investment strategy and the involvement of my family in this effort. I dont think its something I should try to do alone. I need the other people in my family to believe in this idea and make small sacrifices in their lifestyle to make this dream a reality. So their are financial and social aspects to this as well. So if anyone knows of any success stories that sound like the one I am envisioning, I would like to be able to model myself after that.

JB Says: I really like this question. More inheritances are wasted by the second generation than are passed down to the third generation. Statistics have shown that the majority of wealth generated by the first generation is gone by the third generation. Some of this has to do with exponential splitting up of the wealth. For example, the first generation hands it to two children (second generation) and it is split in half. Each half is passed down to the children (third generation) of the second generation, less whatever the second generation spent of it. Assuming four grand-kids, that means the third generation kids each get one-fourth of whatever was inherited, less whatever was spent by the second generation.

Old Money families had created huge fortunes that are not diluted so easily over time, usually have formed a trust to facilitate the passing on of the wealth, and there is often a family business that continues to generate additional wealth. The most successful Old Money families teach their children how to handle money, how to invest, how to give to charity and so on.

If you want to be old money, you will need to generate a significant amount of wealth. Working an average job, raising a family, and doing normal things will not generate that kind of wealth. You will need to build equity in something that will increase greatly in value over time. The best bet is a business you start or buy into and build. You can pile up assets over many decades in the stock market, but most people don’t have the temperament or habits for that approach. Become wildly successful first, and then think about handing money down.

Do you have a burning question on investing you would like answered? Click the button below to send it to me and I will answer it on the podcast!

Activist Investor Action Alert in Roadrunner Transportation Systems $RRTS


Elliot Associates may be providing Roadrunner Transportation some much need financing. Roadrunner went through some financial restatements as one of its leading division's EBITDA disintegrated. Elliot paid $9.02 a share for its position, versus market price around $6.52

About the Author

Jeremy Scott Bailey is an investor, author, entrepreneur and host of the “What Works In Investing?” podcast now available on iTunes. He is founder and Chief Investment Officer of Burgeón Group, Inc. an investment advisory firm that provides portfolio management services to families and individuals.

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