Hi all,
I have been requested to prepare a valuation on a company which our client would like to partly acquire. In addition, a few capital injections will be needed in the next three years.
We have received the company's financial projections based on which I am preparing a DCF valuation. The company's FCF is negative in the coming two years (which explains why it needs capital injections).
Let's say:
- Enterprise Value calculated in the DCF is 100
- Current net debt is 25
- The company needs 10 in capital in the next three years
- Our client would like to own 60%
Is the following correct:
1) The Enterprise Value calculated in the DCF is no pre- or post-money valuation. It is based on future cash flows which of course take into account that the company can achieve them, i.e. it has the required future funding of 10
2) Pre-money equity value is 75
3) For a 60% stake our client pays 60%*75 = 45
4) After the deal our client has to inject 60%*10 = 6 in order not to dilute below 60%
5) Post-money equity value after the funding rounds = 85
6) Client has invested 51 which is indeed 60% of 85
I know somewhat similar questions have been asked before but the answers were pretty conflicting in some cases :)
Thanks!
Why are you assuming a secondary transaction (ie the $75*60%)? If that’s the case, where is the company going to come up with the other $4 that will be needed into the future (after your client funds their $6)? Likely to come from your client (at which point you’re above a 60% ownership), or need to have a subsequent raise. Might as well structure the current raise so that your client gets 60% of the company, for which the funds will be used towards funding that $10mm in the future and then the balance can go to the seller as a secondary.
Valuation is either pre or post money, those are the only two types. If it does not yet incorporate the effect from the new equity, then it is pre-money. Given your dcf does not take into account the new equity, that’s the pre-money valuation, which is the valuation your client’s ownership will strike at.
How much $ and for shag % depends on the structure. If it’s a full on secondary, then your client will have to put up 60% of 75%. Post-money valuation stays at $75 given original owners take their money out.
If it’s all primary and cash going to the B/S, then your client will need to put up (x/(75+x))=60%, where x is their investment.
If they want to be smart and have $10 primary proceeds (so that the losses can be funded) with a secondary aspect for the rest, then the post-money valuation will be (75+10) 85, so x/85=60%, where x = check size. In this case, this is equal to $51. Your sources and uses will be $51 from your client as the sources, $10 to balance sheet and $41 to the current owners. This way 51/85 = 60% ownership and there won’t be a need for a subsequent raise to fund the $10mm gap, while your client keeps their 60% stake.
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