Creativity in Valuation
Hey everybody - have been working in PE for a few years now. Think I've got the basics of the role down but one area that I still haven't quite figured out is how to think through various valuation strategies when bidding on a business. To clarify this a bit, I feel like I often hear my MDs come up with different structures (e.g., X% cash consideration + Y% preferred note, convertible preferred structure with XX% ownership, participating preferred) on the fly.
Has anybody tried to get better on this front? It's a bit more obvious to diligence an investment when you're considering a majority buyout / all common off an EBITDA multiple, but I find that the seniors that can cycle through different valuation methodologies / investment vehicles in their head are most prolific in conversations and convincing IC / sellers that a transaction can happen.
Bump!
Read the book Never Split the Difference: Negotiating As If Your Life Depended On It
Always manage to post the least value add comment
I always expect value add from "Pussy galore"
yeah this is pretty low value add man, that book is great but has nothing to do with financial structuring.
Coming from a trading background into private markets, I noticed how illiterate bankers are at negotiating whereas the structure was usually formulaic and predictable. You can get more creative with structure as a consequence of having creativity in negotiation.
One place I like to look at are deals that ended up in litigation (ie - Texaco's acquisition of Getty Oil, Ceasar's LBO, etc). When transactions are part of litigation, there will be a ton of (pseudo-)publicly available information to look through.
Now, it can be challenging to find these as most don't have books written about them like Getty Oil and Ceasar's do. Unless you have access to something like WestLaw or some similar legal research platform, I am not aware of a good "single place" to point you to on this front.
But this is definitely where you can see more of that type of "unique" structuring and the rationale behind why the structure was put in place.
Outside of deal reps and just seeing stuff in action (the best learning), I would study past deals that your firm has done with structure. Talk to the VP on the deal and figure out why they did this, what were the seller and / or IC dynamics that drove this structure? The more info you can digest on the why, the more you will expand your toolkit and be able to pattern match for future situations.
I'd echo above - these MDs have the advent of precedents and are probably just rattling off structures that they've used before. With that said, here's some scenarios to keep in mind that you can learn more about / look to incorporate:
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