Does Existing Cash / Debt Matter in Calculating Valuation for VCs?
So I know in a buyout transaction, the cap structure of the business pre-buyout doesn't matter b/c the new investor is putting a new capital structure in place and these deals are typically done on a cash-free, debt free basis. However, in a minority capital raise, will existing debt or cash on a business affect the purchase price?
For example, I want to invest in a business with $100M in Revenues with $50M Debt and $10M cash on the books. I value the business at 6x Revenues so $600M TEV. In the buyout scenario, the purchase price of equity would be $600M, but the purchase price of equity in this minority capital raise is really $560M right since the cash and debt stay on the books? ($600M TEV - $40M Net Debt)
TLDR: I think that existing cash and debt on the B/S affects the purchase price of equity in a minority capital raise but not in an LBO. Is this right?
I think you're confusing concepts here, your equity purchase in a buyout scenario is also $560M unless you plan on recapitalizing the business with 100% equity. No difference in approach to a minority investment; you value the business as you typically would (DCF/comps/precedents/etc.) on a pre-money basis, adjust for balance sheet items, and pro forma cash injection from your investment (assuming its a primary sale from treasury vs. secondary from existing investors) to arrive at the post money value.
In a minority capital raise you would ask for the cap table and the waterfall associated with it.
The reason is that there are multiple classes of shares with different rights and liquidation pref.
Then it becomes a guessing game in what will be the value of the business when it is sold or it is IPOed and check how much you would get in the waterfall. You would calculated your IRR and CoC retuemrn based on that.
Most companies flashing unicorn or decacorn status would fetch a lot less at the time of a liquidity event. These inflated valuations are not reflective of the real value of the business. They only reflect the valuation of the preferred shares that were bought.
Ps: whoever threw a monkey shit at me please elaborate why. Because what I wrote is how it works in the real world. Google "medium waterfall analysis", you will find a very detailed article on how share classes seniority has an impact on valuation and returns
Im pretty sure priority is on the basis of last capital in instead of pari passu for the most part, so as new investor you shouldn't be concerned about earlier investors of same class of shares. That said, if there are investors with PIK notes ahead of you that would technically sit above you as it is more debt-like
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