Private Equity interview preparation

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1. 081How would you value a business with negative EBITDA that a sponsor is still interested in?ValuationHardtechnicalPlatinum EquityGeneralist · Los Angeles · 2014

   Say this

   Value it on normalised or post-turnaround earnings, and cross-check against asset value. The question is not what it earns today but what it earns once the fixable problems are fixed, and what it is worth if they are not.

   Then walk it

   1. First diagnose why EBITDA is negative. Cyclical trough, a fixable cost problem, a loss-making division dragging a profitable core, or genuine structural decline. Only the first three are investable.
   2. Build normalised EBITDA: strip out the loss-making division, add back the cost the business should not be carrying, and assume mid-cycle volumes. That gives you an earnings base to apply a multiple to.
   3. Then value the downside on assets: what are the receivables, inventory, property and equipment worth in an orderly liquidation? For a turnaround, asset value is the floor and it is often what makes the deal safe.
   4. Then the cash requirement, which is the thing that kills turnarounds. How much cash does the business burn before it breaks even, and is that funded? A turnaround that runs out of money at month fourteen fails regardless of the thesis.
   5. Structure follows: often a low or nominal purchase price, sometimes the seller paying you to take it, with the real investment being the capital injected afterwards. Platinum Equity built a business on exactly this.
   6. So the honest framing: you are not buying earnings, you are buying an asset base and an option on a turnaround, and the price should reflect the probability that the turnaround works.

   Where candidates lose it

   Trying to apply a multiple to a negative number. The answer is normalised earnings plus an asset floor, and crucially the cash burn to breakeven, which is what determines whether the deal is survivable.

   Expect next

   • How much cash would you need to fund it?
   • When would you walk away from a turnaround?
   • How do you tell a cyclical trough from structural decline?

   Reported by candidates at Platinum Equity (Generalist, Los Angeles, 2014). Source: Wall Street Oasis.

Firm tags come from public, anonymous candidate reports on Wall Street Oasis: strong signal, not sworn testimony. Firms are named as the places a question was reported, not as partners of Fin Maverick. Answers are written for this page to show how to think out loud; they are not scripts to recite.