Private Company Valuation - EV Question

Yes, one would do DCF and arrive at EV.

To move from EV to EqV you need make necessary adjustments often referred to as a "bridge". You would consider elements such as:

• Debt - these stakeholders have claim on company's assets so we need to subtract it

• Cash - we add it assuming that it can be used to repay the debt. Although, in practice a company may have a cash requirements, but for your interview forget about it

• Non-Controlling interest - Minority shareholders have a claim on the company, hence its EV. We need to subtract it.

• Preferred shares - Same story as NCI

• Debt-like items (for e.g.: provisions for legal purposes, unfunded pension deficit, guarantees etc.) - Same story as debt

• Other "asset-like" items (for e.g.: Net Operating Losses that can be used to offset future taxes) - this is an asset that belongs to equity holders, hence we add it

• Associates (Investments in other companies) - it is asset for equity holders that is not included in the EV, therefore we add it

As some of these are difficult to appraise or get information about, for a quick assessment of a private company you would take the EV from DCF, subtract Net debt (Debt-Cash) to arrive at EqV.

At least that is what I have done for MM sell-side pitches of a private companies (We used precedent transactions instead of DCF though). In case you get a mandate and will be going through the whole process, or it is a big company that has associates, different groups of shareholders and etc. you would go through each element of the bridge and probably spend great amount of time fighting with the other side of transaction about value of each of the items.