Small Business Finance…Summer 2009

URG MBA ProgramChapters 9-11

Valuation of CompaniesPrinciplesUsing the Earnings Ratio – Price to Earnings P/E

Examples? Text 1/40, Darlene one to 4 or5 Lodging industry

Pitfalls? If the industry standard is not already set??? Incorrect valuation

Determining Market value – Like appraising realestate Determine parameters Allowing for Risk Multiple comparisons

Customary MultiplesBased on Net EarningsEBIT based multipleBook ValueOther Options

Revenue multiplesOther comparable companies

Cash Flows and Residual IncomeCapital is weighted according to market valueEstimating value for projected periods.According to discounted residual IncomeReal Options method

Pricing Real options from Options to switch Options to abandon Options to delay Options to scope and scale Options to stage

Investor ValueStrategic value is sometimes inflatedVC Discount Rate

Usually higher—why?Usually lowers as company matures—why?

Issuing StockPrice per shareNumber of stocks issued, based on what?

Employee stock options – Advantages?

Venture Capital MethodStage 1: Analyze and Identify the Type and

Time of ExitStage 2: Estimate Terminal Value (TV)Stage 3: Determine the Discount Rate (r)See Mini Case Study: Medica – Stage 3

Page 185/6Stage 3: Determine the Discount Rate ®

Stage 4: Estimate Additional Required Investment

Stage 5: Calculate the Range of Values for Investment

Terms of MeasurementNPV (Net present value)PV (Present Value)Rate of Return

Venture Capital FundsVenture Capital Funds

The massing of funds to be used in up-start company funding

Leveraged buyout and merchant banking fundsAcquiring funds of companies, all or most, in

financial distressHedge funds

Funds that attempt to minimize risk and thus generate less profit

Venture Capital Investors ProfileIntermediaries between investors and companiesThey are an alternative to trading in the stock market

with proven companiesSpecific services are provided to ensure good returns

MoneyFinancial BackingCreditabilityConnections to other financingStrategic connectionsHelp with recruiting managementManagerial and operating knowhowBusiness model assistanceContributing board of directors

VC OversiteInvesting in several “rounds”/controlled

investingSyndication – in conjunction with other

investmentsOngoing control – can be an issueCompensation of entrepreneurs and

managersGeographic preferences

VC Development1980’s1990’s2000’sToday????Future????

Global Market ImpactSpeed of communicationSpeed of bankingDiffering taxation from global perspective

Exit and Return of VC FundsIndustry is volatile – Why?Different years of origin yield differing resultsAppear to be good but are they?

Other Investor OptionsAngles/Private InvestorsCompanies within the fieldCorporate in-house companiesIncubatorsInvestment BanksHolding CompaniesPension Funds (PERA)Insurance CompaniesNot-for-ProfitsMutual FundsCredit CompaniesLeasing