Valuation help, thanks!
Hi,
I've been set a valuation assignment to value a small business and I have a few quick questions that I would appreciate help on.
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If there is a one-off maintenance cost every 5 years of 200k, would it be appropriate to spread the cost annually, i.e. 40k per year?
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If the acquirer is looking for an IRR of 20% say, and this implies a total acquisition value of £X million - would an appropriate bid price be above or below this?
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What is the payback period and how would I calculate this?
Thanks in advance! Any links/excel templates would be very helpful.
Happy to help you work through this but FYI not going to do it for you.
What would be a way that you could spread something over multiple years? It's very common, especially when buying and/or maintaining equipment specifically. If the financials show it as a one time expense then I wouldn't mess with them unless that's in the scope of the assignment. If it's fair game then my questions above should put you on the right path.
Wording is bit confusing here but I think this is an IRR rule question. So if the acquirer is looking for 20% return (implied by an IRR of 20%), can they boost the IRR north of 20% (holding all else equal) by offering a higher or lower price?
The amount of time it takes to payback the investment. If I buy an asset for $10mm and it spits off $2mm of FCF per year, it'll take 5 years for me to be paid back on an absolute basis. On a discounted basis, it'll take longer since a dollar in the future is discounted back to it's value today.
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So seeing as it is a maintenance cost (to maintain capital), could we depreciate the cost over the 5 years? Would this still work given that this maintenance cost of 200k/5 years inflates by 2% per year? Not totally sure how to model this.
I'm trying to get my head around this but it's a bit confusing. So the acquirer is looking for at least 20% to 'break even' (implied by IRR) if he offers a lower price and is successful, and everything else constant, would that mean he stands to gain a higher IRR?
3.Ok thanks, I think this will probably be towards the end of the assignment so will think about it then.
Would it be possible to get a pm conversation going, just so I can nail this assignment? (I'm new to WSO so have a pm limit). I promise it won't take up too much of your precious time! Thanks.
Ya, I think you can probably treat it as maintenance CAPEX. Is it truly a y/y growth or every 5 years? Because if it's every five years then I'd feel even more comfortable about capitalizing and really confused if it's every year.
Exactly. If you reduce the price then the cash flows that you previously had been discounting at 20% to offset the higher price now net out to something > 0. Because the NPV is greater than 0, you have to use a higher discount rate to net to 0 (which as you know is your IRR). Plug in a simple set of cash flows into excel and then play with the purchase price to see how the IRR changes.
No problem, feel free to dm.
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