M&A: pre / post money valuations. Easy question
Hi everyone. Can someone please help answer my conceptual questions below? Thanks so much
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As a buyer, imagine I am evaluating a target. I am trying to figure out how much to pay for the business. I can see the target’s latest financing round and valuations. What is more important for me to look at when deciding how much to bid? The latest pre or post money valuation the target received and why? For example imagine target just finished a series B with $50m pre and $100m post valuation. Would it make more sense for me to offer $60M to buy the business or $110m? The equity values goes up to 100m post, but EV stays at 50 because of the increase in cash right? In which case $60M EV is a more reasonable offer?
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Assume I offer $50M for 100% of business. So EV In the traditional sense here is $50M. Is pre money valuation $50M? Is post money $100M? This just confuses me because nobody would ever say the valuation was $100M…. People would say the EV / valuation was $50m…
- Do pre and post money valuations only look at equity value? If so why do people use this as a proxy for EV? EV includes debt…. So why are we only looking at just equity?
thanks guys.
1. You would have to be a moron to accept a $60M transaction value with a $100M post-money value, assuming you still had significant cash left. The acquiror would either pay for the cash, ie pay a dollar to receive a dollar so it nets out to the EV, or do the transaction on a cash free debt free basis, which means the target gets to keep all the cash minus working capital adjustments but also has to pay back all the debts.
2. Pre money post money are not terms used for M&A transaction values.
3. Pre money and post money both refer to equity value. Pre money is often used as a proxy for enterprise value if one makes the assumption that the company has limited cash/debt before a raise. When you actually invest and receive all the financials, what is reported is the price you pay for the equity (assuming pre-money valuation is disclosed), and only the investor would know the true EV in the academic sense.
Thanks my guy. Mad helpful. A few follow ups below.
1. why exactly is pre money used as a proxy for EV and not post money?
2. imagine this scenario. I’m a buyer looking at fully 100% acquiring a target. They’re currently running a Series X financing and got an offer that puts them at 90 pre 100 post (but I want to acquire 100% of the company). When I’m trying to decide my offer to acquire the company, should I be using the 90 pre as a proxy for the EV I submit? If so, why? Why not the 100 post?
thanks again I really appreciate your help
1. Post-money takes into the account the influx of cash from financing, so by definition it is further from EV. If I continuously pump cash into my startup, the post-money value would rise but that doesn't mean anything has changed in my company, hence pre-money value is a better proxy.
2. If we assume they have not received that cash yet because the funding has not been signed and closed, and we assume there is limited cash/debt on hand, then you would use the 90M as a reference point for your valuation. Why would you use the post-money for a potential transaction that hasn't brought any cash to the company? Post-money is simply pre-money + financing. Doesn't make any sense at all to even think about the post-money valuation in your scenario where the funding hasn't been completed.
Good looks. Really appreciate your help.
what if I’m looking to buy 100% of company. And I saw they recently completed a round 6 months ago with 100 pre, 120 post. Since the financing is complete, would I look towards the 120 post to help determine how much EV I should bid for the target?
You would use the 120M post-money as the reference point, yes, but it's not EV. Think about it this way - if we assume the company had 0 dollars before the financing, has spent none of the investment dollars and has no debt, the company's EV is 100M with the equity value of 120M. Would any rational owner accept an offer of 100M? No, because they have cash on hand of 20M that hasn't been accounted for in the purchase price.
To make it clean, let's assume that nothing has changed in the company at all, so it's still at 100M pre 120M post. So the acquirer can go about this two ways as I described above in a previous comment. 1) they can pay the 120M and pay for the company and the cash (20) as well as assuming the debt (0), so the transaction would net out to 100M + working capital since the acquirer gets all the cash, or 2) they can do the deal on a cash free/ debt free basis, and tell the target "we are going to pay you 100M + working capital, you get to keep all the rest of the cash and assume all the debts.
In both these scenarios, the net cost to the acquirer is essentially 100M.
Got it. So if we assume always a cash free debt free deal, then you just look at pre money for the reference point aka EV?
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