Early Stage Valuation

CHAPTER 8Non-GAAP Metrics in ESE Valuation

In recent years, the range of company performance measures used in valuation has been expanded to include a variety of metrics outside the framework of generally accepted accounting principles (GAAP). The combination of non-GAAP metrics (NGMs) with financial metrics based on GAAP has become a powerful tool to evaluate a company's growth prospects, its strategic direction, and its performance relative to its peers. NGMs are often a significant factor into management's compensation and provide insight into the incentives that drive management's strategic decisions.¹ In this chapter, we provide an overview of some of the most common NGMs that are used in early stage enterprise (ESE) valuation, a definition that covers a broad category of measures of a company's performance that are not included in corporate financial statements.

The first section of this chapter presents an overview of Non-GAAP Financial Measures (NGFM), a subgroup of NGMs, which adjust a GAAP line item (generally revenue, earnings, or cash flows from operations) by adding or subtracting other GAAP accounts. We have already seen examples of NGFMs in earlier chapters. For instance, Free Cash Flows to the Firm is an NGFM that adjusts GAAP net income (loss) to generate a cash flow measure commonly used in DCF modeling. Common measures of profitability based on financial statements earnings such as EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), EBIT ...