privatecompanyvaluation-caraspring07

8/8/2019 PrivateCompanyValuation-CARASpring07

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Valuation Concepts Valuation Concepts


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Valuation in the real world Valuation in the real worldInformation typically is not available onprivate companies

The value of a company is not necessarilyidentical to the bottom line on the balancesheet Companies with a negative cash flow canhave a high valueCompanies with a positive cash flow might have a modest value

Information typically is not available onprivate companies

The value of a company is not necessarilyidentical to the bottom line on the balancesheet Companies with a negative cash flow canhave a high valueCompanies with a positive cash flow might have a modest value


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Valuation in the real world Valuation in the real world

To find out what a company is worth,

sell it Value is partly (sometimes mostly)subjective

Sometimes D&B provides a net worthfigureRead everything you can about yourtarget company it s not just numbers

To find out what a company is worth,

sell it Value is partly (sometimes mostly)subjective

Sometimes D&B provides a net worthfigureRead everything you can about yourtarget company it s not just numbers


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Various ways to measure

value

Various ways to measure

valueBook value

Price/earnings ratio (P/E)Discounted cash flowComparison to similar companies

Book value

Price/earnings ratio (P/E)Discounted cash flowComparison to similar companies


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Comparable companiesComparable companies

Find a similar public companyDownside: a public company is almost always valuedhigher than an otherwise equivalent private company

would beFind a similar private company that sold recently

Downside: the only commonly available metric issales, and value is not always clearly tied to sales oreven profit

Comparison is only method that is possible if you have no access to the financial statementsand appraisals of the assets is comparablecompanies

Find a similar public companyDownside: a public company is almost always valuedhigher than an otherwise equivalent private company

would beFind a similar private company that sold recently

Downside: the only commonly available metric issales, and value is not always clearly tied to sales oreven profit

Comparison is only method that is possible if you have no access to the financial statementsand appraisals of the assets is comparablecompanies


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Valuation Tools Valuation Tools


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Comparison to public

companies

Comparison to public

companies Yahoo Stock Screener(http://screen.yahoo.com/stocks.html )

Parameters that can be usedIndustry (SIC or NAICS)Sales

Enter relevant info for the target company

Look for Market Cap. Your target company value is probablyconsiderably less

Yahoo Stock Screener(http ://screen.yahoo.com/stocks.html )

Parameters that can be usedIndustry (SIC or NAICS)Sales

Enter relevant info for the target company

Look for Market Cap. Your target company value is probablyconsiderably less


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Comparison considerationsComparison considerations Your prospect s industry and company salesrarely match those offered by YahooperfectlyPublic companies tend to be much largerthan their private counterpartsRead the profile to see if the comparison

company is similar in purpose to the target If the public company has flat or negativeearnings, it may still have valueSame may be true of the private company

Your prospect s industry and company salesrarely match those offered by YahooperfectlyPublic companies tend to be much largerthan their private counterpartsRead the profile to see if the comparison

company is similar in purpose to the target If the public company has flat or negativeearnings, it may still have valueSame may be true of the private company


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Comparison to other private cosComparison to other private cosBusiness Valuation Resources (www.bvmarketdata.com )

Pratt s StatsDatabase of over 9,500 private company sales from 1990 to

present Deal price ranges from $1 million to $14.4 billionUpdated monthly with about 100 transactions added / month$595

Bizcomps

Database of over 9,500 private company sales from 1993 topresent 61% of the companies have gross revenues less than $500K 18% of the companies have gross revenues over $1 million$395

INC. Magazine s Ultimate Valuation Guide

Business Valuation Resources (www.bvmarketdata.com )Pratt s Stats

Database of over 9,500 private company sales from 1990 to

present Deal price ranges from $1 million to $14.4 billionUpdated monthly with about 100 transactions added / month$595

Bizcomps

Database of over 9,500 private company sales from 1993 topresent 61% of the companies have gross revenues less than $500K 18% of the companies have gross revenues over $1 million$395

INC. Magazine s Ultimate Valuation Guide


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INC. s 2006 Valuation GuideINC. s 2006 Valuation Guide


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INC. s 2006 Valuation GuideINC. s 2006 Valuation Guide


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BizStats.comBizStats.com

Select the industry

Enter the salesMany elements of the cash flow

statement are shown includingan estimate of retainedearnings

Select the industry

Enter the salesMany elements of the cash flow

statement are shown includingan estimate of retainedearnings


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BizStats.com rules of thumbBizStats.com rules of thumbType of Business "Rule of Thumb" valuation

Accounting Firms 100% - 125% of annual revenues

Auto Dealers 2-3 years net income + tangible assets

Book Stores 15% of annual sales + inventory

Coffee Shops 40% - 45% of annual sales + inventory

Dental Practices 60% - 70% of annual revenues

Dry Cleaners 70% - 100% of annual sales

Engineering practices 40% of annual revenues

Florists 34% of annual sales + inventory

Food/Gourmet Shops 20% of annual sales + inventory

Furniture & Appliance Stores 15% - 25% of annual sales + inventory

Gas Stations 15% - 25% of annual sales + equip/inventory

Gift & Card Shops 32% - 40% of annual sales + inventory

Grocery Stores 11% - 18% of annual sales + inventory


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Business classifiedsBusiness classifieds

BizBuySell

GlobalBX Search for business by line of

business and state

BizBuySell

GlobalBX Search for business by line of

business and state


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Making it practicalMaking it practical


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Case SituationCase Situation

Privately owned grocery chain (2 stores) inNebraskaFounded in 1955405 employeesD&B reports sales of $45.8 million200,000 square feet

No trend information is availableMajor competition is a Super WalMart,recently arrivedProspect is the son of the deceased founder

Privately owned grocery chain (2 stores) inNebraskaFounded in 1955405 employeesD&B reports sales of $45.8 million200,000 square feet

No trend information is availableMajor competition is a Super WalMart,recently arrivedProspect is the son of the deceased founder


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Using valuation guidesUsing valuation guides

INC. GuideMedian sales for grocery stores: $773MMedian sale price: $200M

Valuation multipliers:Best: 4.47

Second and third best: 0.27BizStats Guideline

11-18% of annual sales + inventory

INC. GuideMedian sales for grocery stores: $773MMedian sale price: $200M

Valuation multipliers:Best: 4.47

Second and third best: 0.27BizStats Guideline

11-18% of annual sales + inventory


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Using valuation guidesUsing valuation guides

Estimates using INC:Sales of the target are well below the

median, encouraging us to consider alower estimated valueUsing the second best multiplier: 0.27$46 million = $12.42 million

Estimate using BizStats rules of thumb11% of sales $5 million + inventory18% of sales $8.2 million + inventory

Estimates using INC:Sales of the target are well below the

median, encouraging us to consider alower estimated valueUsing the second best multiplier: 0.27$46 million = $12.42 million

Estimate using BizStats rules of thumb11% of sales $5 million + inventory18% of sales $8.2 million + inventory


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Business classifiedsBusiness classifiedsBizBuySell (search on 9/12/06)

No grocery stores found in NebraskaWidened the search to include surrounding statesResults:

BizBuySell (search on 9/12/06)No grocery stores found in NebraskaWidened the search to include surrounding statesResults:


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BizBuySell 1BizBuySell 1


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Estimated Company Value -

Summary

Estimated Company Value -

SummaryTarget company sales: $46 millionBased on classifieds found, the target company is largerthan most in the regionKnown, but smaller stores are asking the low 6-figuresBV Resources (aka INC valuation guide) value:

Median revenue = $773 millionLow sales price = $14 millionMedian sales price = $200 millionHigh sales price = $1.6 billion

BV Resources multiplier4.47*$46 million =$205.6 million0.27*$46 million = $12.4 million

D&B reported net worth: $6.9 millionBiz Stats rule of thumb for grocery stores = $5 million to8.2 million + inventory

Target company sales: $46 millionBased on classifieds found, the target company is largerthan most in the regionKnown, but smaller stores are asking the low 6-figuresBV Resources (aka INC valuation guide) value:

Median revenue = $773 millionLow sales price = $14 millionMedian sales price = $200 millionHigh sales price = $1.6 billion

BV Resources multiplier4.47*$46 million =$205.6 million0.27*$46 million = $12.4 million

D&B reported net worth: $6.9 millionBiz Stats rule of thumb for grocery stores = $5 million to8.2 million + inventory


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Estimated ValueEstimated Value

The target company is worth$300,000-600,000

$2,000,000-10,000,000$10,000,000-20,000,000Over $50,000,000

None of the aboveI haven t got a clue

The target company is worth$300,000-600,000

$2,000,000-10,000,000$10,000,000-20,000,000Over $50,000,000

None of the aboveI haven t got a clue


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Making sense of it allMaking sense of it all

The problem of company valuation isthe same as for personal net worth:

you can t get the necessary informationThe good news: you don t need to pindown the precise value

You d like to know:If it s $1M vs $100MIf it s a going concernIf the industry is above or below thediagonal on the INC chart.

The problem of company valuation isthe same as for personal net worth:

you can t get the necessary informationThe good news: you don t need to pindown the precise value

You d like to know:If it s $1M vs $100MIf it s a going concernIf the industry is above or below thediagonal on the INC chart.


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Making sense of it allMaking sense of it all

Households with a net worth of $1-$10 million, 2001 IRS data, published in 2006

Distribution of assets across net worth

11.0%12.0%

8.0%

19.0%

7.0%9.0%

17.0%

8.0% 8.0%

0.0%2.0%4.0%6.0%8.0%

10.0%12.0%14.0%16.0%

18.0%20.0%


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If the prospect owns 50%If the prospect owns 50% Assume a company value of between $2 millionand $10 millionThe prospect s share in the target company

could be between$5M (50% of $10 M) and$1M (50% of $2 M)Let s split the difference at $3 million

Reduce the proportions of net worth (from theIRS chart ) for property and stock because of the semi-rural areaThis makes closely held stock a higherpercentage of the prospect s net worth say25%

Assume a company value of between $2 millionand $10 millionThe prospect s share in the target company

could be between$5M (50% of $10 M) and$1M (50% of $2 M)Let s split the difference at $3 million

Reduce the proportions of net worth (from theIRS chart ) for property and stock because of the semi-rural areaThis makes closely held stock a higherpercentage of the prospect s net worth say25%


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If the prospect owns 50%If the prospect owns 50%

Net worth could be about $12

million (private companyownership of $3 million x 4)2%-5% might be

philanthropic capacityCapacity $240,000-$600,000

Net worth could be about $12

million (private companyownership of $3 million x 4)2%-5% might be

philanthropic capacityCapacity $240,000-$600,000


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Consolidated resource list Consolidated resource list

Yahoo! Stock Screener:screen.yahoo.com/stocks.htmlBV Resources: www.bvmarketdata.comInc. Valuation Guide:www.inc.com/valuation/index.htmlBizStats: www.bizstats.comBizBuySell: bizbuysell.com

GlobalBX: www.globalbx.comwww.lambresearch.comWhite Paper www.blackbaud.com/resources/white-papers.aspx

Yahoo! Stock Screener:screen.y ahoo.com/stocks.htmlBV Resources: www.bvmarketdata.comInc. Valuation Guide:www.inc.com/valuation/index.htmlBizStats: www.bizstats.comBizBuySell: bizbuysell.com

GlobalBX: www.globalbx.comwww.lambresearch.comWhite Paper www.blackbaud.com/resources/white-papers.aspx

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