Business Valuation Overview
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Transcript of Business Valuation Overview
Business Valuation Overview
David L. Bookbinder, ASADirector, Valuation [email protected]
Agenda 1
• Introduction & Reasons for a Valuation
•What is Value?
• Valuation Principles & Methodologies
Business Valuation Boot Camp
Introduction & Reasons for a Valuation
What is Business Valuation?
• Business Valuation involves estimating the value of a business or business interest
• Business valuation analysis is a surrogate for public market
• Business valuation is most prevalent in hard-to-value assets such as stock in privately held businesses
• BV is analogous to real estate appraisal
3
When are Valuations Needed? 4
“Magnificent Seven” Questions to Ask when Selecting a Valuation Advisor
1. What % of your career is dedicated to BV (100% is the correct answer) and how many BV professionals are on your staff?
2. How many BVs have you/your firm completed?
3. How many BVs for this purpose have you/your firm completed?
4. Professional certifications related to BV (e.g., CFA, ASA, ABV)?
5. Have you given presentations/written articles on BV?
6. Can I have references from former clients, advisors, etc.?
7. Fee structure and expected turnaround time
5
Typical Valuation Process
1. Scoping Out the Engagement• Confirm Purpose/Standard of Value/Valuation Date• Fee Quote/Timing• Complexity/Intended Audience
2. Review & Analyze Requested Information• Business and Industry• Historical/Projected Financial Performance
3. Due Diligence Meetings/Management Interviews
4. Select & Apply Appropriate Valuation Methodologies
5. Present Conclusions
6
Business Valuation Boot Camp
What is Value?
What Standard of Value?
Liquidation Value• “Fire sale” of assets; lowest type of value
Fair Market Value• The price at which an asset would change hands between a willing
buyer and a willing seller, when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties being able, as well as willing, to trade and well-informed about the asset and the market for the asset.
• Assumes a financial buyer…no acquirer synergies are considered• This is the typical definition for regulatory purposes (e.g., IRS, DOL,
etc.)
Strategic Value• Value to strategic buyer, considering add-backs, synergies, etc.• Value is buyer-specific (i.e., different buyers will have different
perceived values)
8
Enterprise Value vs. Equity Value
Enterprise Value the value of the business as a whole; may be viewed as:• Total invested capital (equity + debt – cash)
Equity Value = Enterprise Value – Debt + Cash• Represents shareholder value (i.e., stock value)• Zero-sum game: $1 more of debt = $1 less of equity• Analogous to home value less mortgage
9
Business Valuation Boot Camp
Valuation Principles & Methodologies
Valuation Methodologies
Asset Approach
• Asset-intensive
• Liquidation
Income Approach• Multiple-Period Discounting Method (e.g., discounted cash
flow)• Single-Period Capitalization Method (e.g., capitalized cash
flow)
Market Approach• Guideline Public Company Method• Guideline Transaction (M&A) Method
11
Overview of Valuation Principles
Valuation Must be Forward-Looking
• Must consider anticipated future performance
• Historical performance may help predict the future
Future Cash Flow is Key Driver of Value
• Future cash flow is king
• Must consider risk in realizing projected cash flow
Factors Considered in Valuations
• Historical and expected future performance & trends
• Market multiples of comparable companies and transactions
• Economic, industry, and company-specific factors
12
Asset Approach Overview
Premise: The value of a business can be estimated based on the value of its underlying assets and liabilities
Adjust ALL assets and liabilities to FMV• Must include booked and un-booked assets and liabilities
• Must include tangible and intangible assets and liabilities
When is the Asset Approach Most Appropriate?• Generally appropriate for holding companies or asset-
intensive companies with modest profitability
• Generally less appropriate for profitable operating entities
13
Income Approach Overview
Premise: The value of a business can be estimated based on the present value of the future economic benefits it generates
Steps in performing the income approach:• Select & Determine Earnings Stream
• Develop Appropriate Required Rate of Return
• Select & Apply Multi-Period or Single-Period Model
14
Preferred Earnings Stream: Distributable Cash Flow
Normalized After-Tax Net Income+ Depreciation and Amortization- Capital Expenditures+/- Additional Net Working Capital Requirements= Distributable (Debt-Free) Cash Flow
15
Required Rate of Return
An investor’s required ROR is a function of the perceived risk & potential of the investment
Cost of Equity (ke) = Rf + (ERP x β) +/- Company-specific risk factors
WACC = ke*%e + kd*%d
Match Cash Flow with Rate of Return:
• Cash Flow Available to Debt & Equity – Use WACC• Cash Flow Available to Equity Only – Use Cost of Equity
16
Selecting a Model: Discounted Cash Flow vs. Capitalized Cash Flow
Multiple-Period Models (e.g., discounted future cash flow) are often far more appropriate because: • Can account for anticipated changes in the business such as
growth rates, margins, upcoming investments, business strategies, etc.
Single Period Models:• Only appropriate if growth in future cash flows is projected to be
constant
• Difficult to rely on single-period models during times of turbulent economic conditions and/or volatile company performance
17
Year 1 Year 2 Year 3 Year 4 Year 5
Distributable Net Cash Flow 5,000,000$ 5,500,000$ 5,940,000$ 6,296,400$ 6,611,220$
Present Value Factor @ 18.0% 0.9206 0.7801 0.6611 0.5603 0.4748
Present Value of Distributable Cash Flow 4,602,873$ 4,290,814$ 3,927,186$ 3,527,811$ 3,139,154$
Present Value of Cash Flows (Years 1 to 5) 19,487,838$ Year 5 Cash Flow 6,611,220$ Present Value of Residual Cash Flow 25,354,703 Multiplied by: 1 + Growth Rate 1.05
Residual Cash Flow 6,941,781 Enterprise Value 44,842,541
Discount Rate 18.0%Rounded 44,800,000$ Less: Residual Growth Rate -5.0%
Capitalization Rate 13.0%
Residual Cash Flow Value 53,398,315Present Value Factor 0.4748
PV of Residual Cash Flow 25,354,703$
Discounted Cash Flow Example18
Market Approach Overview
Premise: The value of a business can be estimated based on comparisons to similar businesses
Guideline Public Company Method• Stock market is the best and most accurate source of valuation
data; it is the source of rate of return data in income approach• Compare fundamentals of subject company and peer group of
publicly traded companies• Apply pricing multiples (e.g., price-to-earnings, enterprise value-
to-EBITDA, etc.) of publicly traded comparable companies
Guideline Transaction Method• Identical to public company approach, except use transaction
multiples from M&A deals as basis for valuation• Information about each transaction is typically limited since
deals often involve private companies
19
Guideline Public Company Method Example 20
Closing Stock Price(12/31/07)
ABC 5.00$ x 45.52 = 227.6$ + 221.8$ - 108.4$ = 341.0$ 8.5 9.3 0.42DEF 25.50 x 22.18 = 565.6 + 305.8 - 78.4 = 793.0 7.4 8.6 0.34GHI 38.75 x 31.54 = 1,222.2 + 751.8 - 45.0 = 1,929.0 10.7 13.1 0.75JKL 8.00 x 18.95 = 151.6 + 0.0 - 3.6 = 148.0 6.2 7.8 0.33MNO 9.50 x 24.64 = 234.1 + 18.5 - 8.4 = 244.2 5.4 6.4 0.55PQR 18.25 x 41.84 = 763.6 + 106.9 - 24.7 = 845.8 6.8 8.5 0.68STU 14.00 x 35.72 = 500.1 + 247.9 - 7.4 = 740.6 5.7 7.4 0.42VWX 11.50 x 65.90 = 757.9 + 1,085.2 - 222.1 = 1,621.0 9.5 13.8 0.81YZ 22.75 x 45.52 = 1,035.6 + 333.6 - 26.9 = 1,342.3 7.1 8.9 0.59
Low 25% 6.2 7.8 0.42Median 7.1 8.6 0.55High 25% 8.5 9.3 0.68Variation 23.8% 26.9% 32.7%
Selected Multiple 6.5 8.1 0.45Subject Company Results 6.7 5.1 89.6Suggested Value 43.55 41.31 40.32
Concluded Enterprise Value: $42,000,000
EV / EBITDA
EV / EBIT
EV / Sales
Pricing Multiples
Debt & Preferred
StockCash and
EquivalentsEnterprise Value (EV)Co.
Derivation of Enterprise Value
Shares Outstanding
(millions)Market Value of Equity (mil)
• Valuations should consider all methodologies and utilize the appropriate ones; income and market approaches are most common with strong, profitable companies
• Valuation opinions supported by multiple valuation methods are preferable, more defensible, and often lead to more stable, accurate, and sustainable valuation levels
Valuation Methodologies
Guideline Public Company Method
Discounted Cash Flow Method
Net Asset Value Method
Guideline Transaction
Method
Valuation Conclusion
21
Key Valuation Concept: Valuation is Forward-Looking
22
“It’s tough to make predictions, especially about the future.”
-Yogi Berra
About The Presenter 23
Dave Bookbinder is a Director of Valuation Services with GBQ Consulting. Dave and his team serve companies of all sizes, public and private, in a variety of industries and geographies. More than a valuation expert, Dave is a proactive problem solver who strives to lend his business experiences to help people with a variety of matters.
Dave's team has been recognized by Acquisition International Magazine as Best in Sector, Financial Services; recognized by Wealth and Finance International as Best for Valuation Services; and recognized as an Inside Public Accounting All Star - #1 Valuation Firm for the Third Consecutive Year.
Dave was personally recognized by SmartCEO Magazine with an award for Executive Management and has also been the recipient of his firm's Founders Award. However, the recognition that Dave is most proud of is an award for Best Corporate Culture.
For additional insights from Dave, visit his LinkedIn Pulse Author Page, subscribe to his blog at Huffington Post, and follow him on Twitter. You can also email Dave at [email protected].
You might like some of Dave’s most popular content: In The Shark Tank It’s All About Valuation; What Is My Business Worth?; 5 Things Leaders Look For in a Difference Maker and The New ROI: Return On Individuals.
David L. Bookbinder, ASA
Director, Valuation [email protected]