Pre-money post-money EV, DCF
I have a question that keeps arising when conducting valuations of private companies with sought after growth/primary capital (capex, NWC). This growth capital might be in addition to the secondary portion, and it might be that in addition to the equity capital, the company raises debt to finance part of the business plan. But the questions I have are:
1. Most often than not, the business plans assume an injection of growth capital to achieve the business plan. If the forecast assumes equity injections to finance that business plan, is the DCF done, with the unlevered FCF, representing the post-money EV of the company, or pre-money?
2. If its post money, can the "post-money" forecast be adjusted to represent pre-money valuation by deducting the amount of growth equity (capex or NWC) injected? I.e. say the DCF gives you an EV of 100m. The forecast assumes 20m invested by an investor on day 1, of which 15m goes to growth capex and NWC, and 5m to buy the shares of the company. Can one deduct the 15m, at the nominal amount (15m), from the EV (100m) from DCF, to get a pre-money EV of 85m?
To try to still explain where I'm coming from: I do understand that the free cash flow forecast, by definition, of course include the capex and NWC investments, but despite this, isn't it still a post-money EV forecast because the level of EBITDA, revenue etc. assumed in the model indirectly assume the capex and NWC investments to take place, but these are financed by external capital, and without it they couldn't generate that EBITDA/revenue etc. ==> Hence to make it a pre-money, we need to deduct from DCF result the share of investor's money that goes to capex and NWC.
Thanks a lot, really appreciate all the thoughts you might have around this topic! And I guess if you have any recommendations on sources that have been helpful for you to enhance understanding of PE valuations, please let me know!
Based on the most helpful WSO content, here’s how to approach your questions:
Pre-Money vs. Post-Money EV in DCF:
When conducting a DCF analysis, the enterprise value (EV) derived from unlevered free cash flow (UFCF) typically represents the post-money valuation if the forecast assumes the injection of growth capital. This is because the forecasted cash flows inherently include the impact of the growth capital (e.g., capex and NWC) on revenue, EBITDA, and other financial metrics. The business plan assumes these investments are made, and the resulting EV reflects the value of the company after these injections.
Adjusting Post-Money EV to Pre-Money EV:
Yes, you can adjust the post-money EV to reflect a pre-money valuation by deducting the portion of the growth capital that directly contributes to capex and NWC. Using your example:
Key Considerations:
Additional Resources for PE Valuations:
Let me know if you’d like further clarification or additional resources!
Sources: DCF Modeling Course ~ Pre-training text.pdf, Free Cash Flow to Firm vs. Free Cash Flow to Equity Growth Rates, Pre-money vs. post-money valuation and Modigliani Miller, DCF Analysis Urgent Help, Pre-Money vs Post Money Valuation
While the bot reinforced my thought process on the topic it would be great if someone else can share their views on this as well.
Thanks! Yep clearly its not ideal to back-solve pre-money EV from post-money business plan, but it feels like I’m seeing only post-money forecasts from the potential targets, so have to do something with what I have I suppose.
Excepturi illo voluptas quis ab. Assumenda nulla rem dolores corporis qui. Est dolorem recusandae sed vitae. Eos animi ut quod quaerat.
Excepturi aut est aperiam est odio. Sunt et magni consequatur officia quasi.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...