Valuation of existing business (kindergarten)

Hello, folks!

This is my first post on WSO.
I am new to financial modeling.

Here is the following situation: one person wants to sell his/her business, namely a kindergarten. The business is stable and was created 3 years ago. I know how much the business generates and all the expenditures associated with it.
I want to use DCF model for getting enterprise value.

I am stuck with this: should I use CAPEX (price for which the building was bought and some additional assets (furniture, special stuff for children and so on) which took place 3 years ago, when the business started?

There is no problem in calculating discounted cash flows, but when it comes to calculating NPV, I must consider initial investment, which is CAPEX that appeared 3 eyars ago in this case, but I am trying to figure out the value of the company now. What should I do?

I hope to get some feedback guys!
Thank you!

 
Best Response

The NPV three years ago is irrelevant to its value today. Those are sunk costs. You need to looks at forecasted capex. What's the condition of the building, furniture, etc...? When will they need to be replaced or repaired in the future and at what cost?

The past expenditures will basically just sit on the balance sheet (probably PPE) net of depreciation. More relevant to the valuation will be the market value of those assets, which could differ considerably from the book value.

 
inkybinky:
The NPV three years ago is irrelevant to its value today. Those are sunk costs. You need to looks at forecasted capex. What's the condition of the building, furniture, etc...? When will they need to be replaced or repaired in the future and at what cost?

The past expenditures will basically just sit on the balance sheet (probably PPE) net of depreciation. More relevant to the valuation will be the market value of those assets, which could differ considerably from the book value.

Thank you, inkybink! I have come to a conclusion that in order to calculate value for which owners can sell the kindergarten I should find out the market value of the building and all the equipment and add final year EBITDA * exit multiple, say 7. What do you think?

"When the first primitive man decided to use a bone for a club instead of eating its marrow, that was an investment'' - Anonymous
 
Financier_MA:
inkybinky:
The NPV three years ago is irrelevant to its value today. Those are sunk costs. You need to looks at forecasted capex. What's the condition of the building, furniture, etc...? When will they need to be replaced or repaired in the future and at what cost?

The past expenditures will basically just sit on the balance sheet (probably PPE) net of depreciation. More relevant to the valuation will be the market value of those assets, which could differ considerably from the book value.

Thank you, inkybink! I have come to a conclusion that in order to calculate value for which owners can sell the kindergarten I should find out the market value of the building and all the equipment and add final year EBITDA * exit multiple, say 7. What do you think?

If they own the building outright, otherwise you might want to use the equity that they have against the mortgage. The condition of the building and equipment might matter, too. Was it well-maintained or will a buyer have to spend some extra cash to replace equipment or maintain the building (which is why you may want to forecast cash flow).

I don't know what the exit multiple might be, but 7 seems kind of high to me. It sounds like this is essentially a no growth business with low liquidity that probably requires active management by the owners. Caterpillar has an P/EBITDA of about 7.5, so I don't know why an investor would choose to invest in this kindergarten over something like that at that price. Assuming no growth, an effective tax rate of 35%, and ignoring depreciation, that multiple translates to about a 9% return. Less with depreciation and possible capex requirements.

I'd try and look up some comparables to see if that multiple is within reason.

 
inkybinky:
Financier_MA:
inkybinky:
The NPV three years ago is irrelevant to its value today. Those are sunk costs. You need to looks at forecasted capex. What's the condition of the building, furniture, etc...? When will they need to be replaced or repaired in the future and at what cost?

The past expenditures will basically just sit on the balance sheet (probably PPE) net of depreciation. More relevant to the valuation will be the market value of those assets, which could differ considerably from the book value.

Thank you, inkybink! I have come to a conclusion that in order to calculate value for which owners can sell the kindergarten I should find out the market value of the building and all the equipment and add final year EBITDA * exit multiple, say 7. What do you think?

If they own the building outright, otherwise you might want to use the equity that they have against the mortgage. The condition of the building and equipment might matter, too. Was it well-maintained or will a buyer have to spend some extra cash to replace equipment or maintain the building (which is why you may want to forecast cash flow).

I don't know what the exit multiple might be, but 7 seems kind of high to me. It sounds like this is essentially a no growth business with low liquidity that probably requires active management by the owners. Caterpillar has an P/EBITDA of about 7.5, so I don't know why an investor would choose to invest in this kindergarten over something like that at that price. Assuming no growth, an effective tax rate of 35%, and ignoring depreciation, that multiple translates to about a 9% return. Less with depreciation and possible capex requirements.

I'd try and look up some comparables to see if that multiple is within reason.

Yes they 100% own the building. It's condition is fair enough, coz it's a brand new building, was constructed about 5 years ago.No serious maintenance works for the building are expected from the future new owners. You are write, it's no growth business, but still generates stable amount of CF, thanks to baby boom in the country (not US). Thank you for your time, pal!

"When the first primitive man decided to use a bone for a club instead of eating its marrow, that was an investment'' - Anonymous
 

Basically, they can sell the building and equipment they have got. But it's not just about the fixed assets. They have well organized business with stable cash flows coming from the parents of the children who attend the kindergarten. Not to mention, they have personnel, methodology for teaching and so on. So how to find adequate value for the business taking into account all of the variables written above? Please advise!

"When the first primitive man decided to use a bone for a club instead of eating its marrow, that was an investment'' - Anonymous
 
BlackHat:
I'd feel like such a badass if I could tell people I owned a kindergarten... don't forget novelty ownership value
In some countries, especially in those which experience baby booms, it's quite a prudent business. Not that it cash cow business, but quite stable though. Thanks for mentioning novelty ownership value aspect.
"When the first primitive man decided to use a bone for a club instead of eating its marrow, that was an investment'' - Anonymous
 

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