Best approach to estimate sale value?
Happy new year folks.
I'm trying to calculate the return on a capital-growth private equity investment in a firm with a stake of 30%. I have the investment amount in year 0, and expected share of dividends for years 1 through 5. Assuming the firm's mandate is to exit in 5-7 years, what would be the best approach here to estimate sale value and calculate IRR?
There is no comparable peer data so multiples are not an option. In this situation obviously the only option is terminal value. So if I calculate terminal value of FCFF at the end of the 5th year, is this the expected sale price? I see some people do it this way, although it doesn't make a lot of sense to me. Shouldn't we add to that cash and subtract debt, just as you do when you value the company’s equity as a target? For example, if the company do not pay our cash dividend through the holding period, this cash will accumulate on the balance sheet and when you sell the buyer has to give you value for your proportionate share of cash balances, same goes for company debt.
So for the 5th year what I currently have is the year’s expected dividends, terminal value of my share of FCFE (the company will have zero debt in the 5th year) added to which is my proportionate share of BS cash at the end of that year, which collectively I assume to be the expected sale price of my share in the company.
Is this good/bad? Would be great to hear opinions and advice on how to reflect expected sale price in DCF’s terminal value.
Cheers!
Anybody?
Use entry multiple
I feel entry multiple wouldn't be the best approach in my case. I'm investing in a fairly small company with great growth potential and accordingly high risk. On exit 5 years later the company has grown and stabilized, hence growth and risk profile is different which should reflect into the multiple. What do you think?
Sounds like you already have an idea what exit multiple should be so use it.
Otherwise just make shit up... Would be most appropriate since this sounds like VC.
Thanks. Not exactly VC, sort of a small-ish company in a country where not much PE activity goes on so it's hard to look at the market for answers.
So say I entered at 10x EBITDA. On exit, where growth potential will be much lower, and profitability more stable, I presume the EBITDA multiple ought to be lower, say 7.5x. Is this reasoning correct? And if I do calculate exit multiple, what happens to the cash on the BS of the firm on the exit year, shouldn't I take proportionate share of it in my IRR calculation since that goes into my equity value at that point of time, just like it went into calculating the original value of company's equity at time of acquisition.
Cheers
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