Client: my factory was valued at 2 Billion EGP 7 years ago
Me: Is that an asset valuation?
Client: yes.. I converted the value of the factory in EGP to the USD rate back then. 2 Billion EGP is the value of the factory when I reconvert to EGP using today's exchange rate.
Me: I see. What's your EBITDA?
Client: About 100 million EGP. Why?
Me: Well, for me, a value of a company is transactionable value. In other words, if you can find a buyer for the factory who is willing to pay 2 Billion EGP as an asset valuation, then I would accept that this is the valuation.
Client: But you don't think that this valuation is correct?
Me: I can only speak to transactions that I can actually execute. Private equities use EBITDA multiple for enterprise valuation. Basically, they set a multiple based on company/industry risk and growth potential, add back net cash (your cash minus your debt).
Client: What multiple would my company get?
Me: It varies, but for your industry, I have seen multiples go as high as 11. So your equity value would be 1.1 Billion EGP. Since you have a net negative cash position, your equity value would be lower than that number.
Client: #!@$*##
Me: I understand your frustration, and my advice is this: if you can find a buyer who is willing to buy at 2 Billion, sell and put your money in the bank. Your return will be higher than 100 Million. If you're worried about the devaluing EGP, put your money in yield-generating real estate. You would still make more than 100 Million a year
Client: Are you asking me to go out of business???
Me: No, I am asking you to either accept a more realistic valuation, or find the buyer who will pay this 2 Billion EGP. I cannot find such a buyer. And if the value of your business is indeed 2 Billion EGP on an asset valuation, then something is wrong with your economics. How can assets of 2 Billion generate less return than bank interest? Anytime your EBITDA-based valuation is lower than your asset valuation, it means the company's economics don't work.
An actual conversation with a client.
