Discounting rate valuing startups
Hi, I have a question from my CF assignment - hope I can get some help.
When an established value company Venture arm acquires a smaller tech start-up that have say just break-even, what's the discounting rate to value the target company?
Reason for asking is that if I assume the buyer is a VC company, discounting is normally the expected return depending on target's maturity stage (eg. 30%).
On the other hand if the buyer is a value company, they would normally discount CF with their cost of capital which is say 8%. This leads to a massive difference in valuation.
I think the issue originates from the value company using "one measure fits all" for all its projects, without changing discount rate by riskiness, but none the less I am bit confused about this.
Any thoughts?
Many thanks!
Correct me if I'm wrong but I think what you're asking is: Company A is an established firm acquiring startup Company B and you're wondering which discount rate to use, Company A's or Company B's. In this case you would certainly use Company B's cost of capital to value Company B. It would make no sense to apply the wacc of an established firm to a startup.
Thanks DD; I agree that the valuation of B should be based on B's cost of capital. However when A acquires B, B's risk of failure reduces significantly because A will integrate B. A has plans to boost B's sales and make it a success story. A's financial model should discount B's Cash flow at A's Wacc? If A's Wacc is
No, syngergies are priced into the cashflow portion of your valuation, not the discount rate. And even so, the type of synergies you're talking about sounds like revenue synergies which are almost never used/taken seriously because they are so difficult to realize in practice.
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