Leveraged Buyout Returns
Now that the model is complete, we are ready to begin estimating the expected return of the investment in the entity to 3G Capital and Berkshire Hathaway. As discussed in the beginning of the book, the returns assume there will be some sort of exit event in the business. Although we have built a five-year model of the business, we are not certain of any intent to actually exit the business after five years. However, calculating returns under the assumption that there will be an exit does give an indication of value. So even if 3G Capital or Berkshire Hathaway does not have any intent to sell the business after five years, they should be performing a similar what-if analysis to at least determine the value of their investment.
As mentioned in Chapter 3, the exit is most likely based on an earnings before interest and taxes (EBIT) or earnings before interest, taxes, depreciation, and amortization (EBITDA) multiple. We can find appropriate exit multiples by looking at comparable companies or historical transactions. However, it is common to take a more conservative approach looking at the purchase multiples of the business. Whatever multiple was paid for the business can be used as the exit multiple. If we paid 5x EBITDA for a business today, we would hope to sell it for at least 5x EBITDA five years from now. Although the multiple is the same, we hope we have successfully grown EBITDA in five years so that the exit value will be higher. ...