I am in a curious project and could use some input.
If a prop trading firm decides to put themselves up for sale, what is the best way to value the firm? Does the IP, seats, licenses, etc. mean more to a buyer than the future cash flows? ( don't most firms over value cash flows anyway) Are there some models that are more reliable than others? Any insight would be appreciated.
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I'm guessing in a similar manner to a hedge fund?
I would imagine that it is very similar too, but maybe a little less complicated. Past results are not a good indicator... So do you start at zero or with some discounted cash flow model?
Thing is you only have past results, otherwise what would you base your value on? You will be valuing the manager, his analysts, proprietary knowledge, expertise, track record, etc. Otherwise, anybody could set up a fund for $2mm and they would all have the same value.
Based on what another user posted, ''there's a couple different metrics to look at, but the big three are AUM, Revenue, and EBITDA. Most of the value of a HF comes from the management fees (revenue) they take in, so you can look at a multiple of revenue (~2-4), multiple of EBITDA (don't want to do a hard-and-fast multiple range here), or a percent of AUM (~1-3%). Really the only costs associated with managing a HF are compensation (definitely biggest) and some minimal overhead. Any revenue above those costs is where the value is created.".
For an HF that makes sense. For a prop shop, you would also look at the future cash flows, but that is just not as reliable a number since there is no outside money or equity raising really. Just- how well do your strategies work? It seems to be that the IP is what really interests people, and I am not sure how to value that.
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