How do investment banks evaluate a private firm going public? Is it based on the assets owned by the company?
Suppose a private firm(sole proprietor) has assets worth 50crs(zero Liability). Now I want expand my company by taking it public. I reach out to an investment Bank. Will the investment bank evaluate the worth of my company more than or less than 50 crs. And what will be the owner’s share in the resulting public company?(It was 100% earlier)Am I missing something?Could anyone please explain this concept with an example?Thanks
You would value a private firm the same way as a public firm, either with a relative valuation and / or an intrinsic valuation method
Suppose the valuation turns out to be 75 crores(in this case).Then stocks worth 75 crores will be issued?
No, you'd issue a public offering of however much you're raising, not the whole valuation of the company. The private company already has shares before it goes public; they just aren't on the public market.
Could you please exemplify this point with an example?I am struggling with this concept.Suppose I the owner of a firm with assets worth $50 million and zero liability.Now I want to raise funds by going public.How will this be done?
Suppose I am the sole owner (100% equity) of a private company A. Now I decide to go public. After doing some valuation (DCF/relative) I realize that my company is also valued around $100 million. Now how did I come to this $100 million value you ask? 1 way is by relative valuation. For example I realize that my competitor, pubic Company B has the value of $100 million. I decide that my company is similar to Company B so decide to value my company, Company A $100 million. Another way is through intrinsic valuation (DCF) which I won't go in detail.
So that means after our valuation, theoretically 100% (equity) of the company = $100 million. Remember these values are all estimates, no valuation can truly give a 100% accurate amount for any company. That is why we use multiple valuations to get a ballpark of the "true" value of said company.
When I go public I decide to give some % of the company I own to the public in exchange for cash. Lets say I offer 30% of the company, then for giving up 30% of my equity in the company, I will be getting $30 million. And this $30 million will be split into x amount of stock. So for example if each stock is worth $10 there will be 3,000,000 stock in the market.
Now this is really simplified but I hope this sort of answers your question.
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