With U.S. agribusiness currently in a mature phase, industry participants often find it more efficient to acquire businesses than to launch them. Mergers and acquisitions involving food producers and suppliers typically are priced as a multiple of Ebitda. The biggest variable cost affecting earnings is food commodity prices.
To protect their interests, both sides of a potential transaction need to take into account the volatility of food commodity prices when constructing models to arrive at a valuation multiple that reflects the earnings potential of the company by segregating the component of Ebitda that is related to commodity price volatility. Failing to anticipate uncertainty in food commodity prices, the largest component of cost of goods sold (COGS), could result in buyers overpaying for an acquisition or sellers divesting their businesses for less than they are worth.