How is Market Value of Equity calculated for an unlisted company?
Hey guys,
How is Market Value of Equity calculated for an unlisted company? Using comps? how? What if the comps aren't comparable? Use book value of equity?
Thanks!
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I'm curious to find out as well, but after giving it a moment's thought, this is what I think:
The market value of equity is essentially the book value of equity + any premium the market puts on it. Since a company is private (no financial disclosures for potential investors to come up with any judgement etc.) then market value of equity would essentially mean book value of equity. It would then make sense to not term it "market value" then.
I'm not 100% certain that I'm right so would be great if we have more input.
This is kinda close.
We looked at a private company to acquire a few years ago -- was a rather small outfit. I took their financials and ran out some projections and DCF'd their valuation. I ran a few growth scenarios to create our preferred range.
We also tried to value this based on book value of equity + premium to equity. This premium, however, can be tough to assess for a sector with very little public market. It can also be a little faulty in a small but rapidly growing company -- you'll have very little equity and a big premium.
They had an adviser who was looking for 3-5x projected EBITDA.
For a myriad of reasons, we didn't execute.
Heya Birdo,
Thanks for the input, the part on DCF'ing the projections definitely make sense - not too sure why that wasn't the first thing I thought about.
One more thing - in carrying out the DCF, did you guys use FCFE or FCFF? In essence I'm asking if the PV that you guys got from the DCF is equity or enterprise value. I know it doesn't make a difference when it comes down to calculation (you can get either figure either way) but I'd like to know how its done in practice.
Thank you very much! Cheers
So -- interesting question. We tend to use Free Operating Cash Flow (FCFE) as our initial pass. If a target can't generate operating cash, we aren't going any farther. (Again -- depending on industry or targets, this may change -- your startups typically won't cash flow)
So....for this particular instance it didn't matter as our target had no debt outstanding.
Another acquisition we did execute on, we looked at FCFE. Principal payments are a real cash requirement. We wanted to know what the real cash implications would be for us in both the short and long-term. We're private so we don't really worry about equity as much as we do about cash. Feeding our Equity/Net Assets line tends to be a bit of an afterthought. Feeding cash is our primary concern.
This is just my experience, however; other places may do this differently. One of our big competitors, for example, has a fairly regular debt program and typically replaces all debt from acquired subs the year or two after acquisition (and then funds those principal payments from the obligated parent, not necessarily the subs). They may not care as much about principal payments as they can likely obtain better terms when revisiting the debt markets.
From a theoretical standpoint, the process for valuation shouldn't be that different from that of a listed company; you just have much less data to work with. You can use comps (including an approach of analyzing the business makeup based on revenue and then creating a weighted average multiple) or DCF, in which case you'll need to calculate a bottom-up Beta to discount the returns, since you can't rely on most data sources to list a beta (and you can't do a regression yourself).
It's whatever the company can be sold for minus the debt today. How you estimate that will vary case by case depending on circumstances and the data you have. Could be DCF, multiple on earnings based on recent transactions, replacement value of the assets etc.
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