HELP - Private Company Valuation

I have the task of valuing a private business. Its a mature company in the firearm industry. I've been given 4 years of historical BS and IS. I believe I should be using a relative valuation approach as apposed to a DCF/income approach. Being new to valuation, I'm unsure whether as to where to start. Do I need to estimate the FCF or should I focus on multiples? Can someone point me in the right direction? Thanks.

 

If its a stable mature company, I suppose you could probably get away with using historical to build out a forecast.

For a quick back of the envelop analysis you could find comparable publicly traded companies and apply a multiple. I would also apply some sort of discount since its a private company.

Not sure what the purpose of this exercise is, so this is just a quick and dirty way.

 

then it would NOT be disclosed publicly / or thru its means

Thomson/ReutersOne Private Equity (previously called venture expert) Thomson/ReutersOne also has a M&A database (previously called SDC platium)

DowJones Private Equity Source

Thedeal.com database

Pitchbook.com database

S&P databases? S&P also owns CapIQ

Factset databases?

Your firms proprietary database

 

In the past, I've seen posts on the Sherdog forums that linked to some summary financial info. You might want to check there. The problem is, a lot of it is written by MMA guys, and most of them aren't the sharpest cats around.

 

DLOM is applied to equity value, since that is the one hard to market. The marketability of the debt is not an issue, as long as you go with the (usual, simplifying) assumption of "market value of debt = book value of debt". To do so is ok, as long as the debt isn't publicly traded.

Note that while a private company's debt will often be harder to market than a public one's (giant corporations often have some of their debt financed via traded bonds vs. small private companies often using regular bank loans), it might be the other way: a private company may have public debt. This highlights that the "public vs. private" differentiation for DLOM refers to equity, but the same basic argument may be made about private vs. public debt, as well.

 

They want you to essentially value each portion of the assets? Never seen someone "value" marketing or approach valuation in this manner. Have you done a valuation previously?

You realize that the other three are going to be rolled up under assets, right? Were they referring to current assets perhaps (i.e. inventory, A/R)?

 
peinvestor2012:

They want you to essentially value each portion of the assets? Never seen someone "value" marketing or approach valuation in this manner. Have you done a valuation previously?

You realize that the other three are going to be rolled up under assets, right? Were they referring to current assets perhaps (i.e. inventory, A/R)?

Yes, that's what they want me to do. I don't think they have any idea what they are talking about, but that doesn't really help me. I did public company valuations in my last life, and I know how to do a normal private company valuation. This request was so bizarre to me that I had to find out if anyone else has heard of it.

Yes, I know, marketing/R&D/IP really should all fall into assets, and they definitely didn't mean current assets. I'm guessing there is some context for this request I am missing.

 
Best Response

Hopefully someone with more experience will chime in here.

You obviously shouldn't be doing a 3-statement model. You don't have any historicals to work from.

I would use the income statement to get to EBIT. There would be no need to build out a debt schedule or calculate interest expense. For DCF purposes, we are concerned with unlevered free cash flow, which comes before interest payments.

Next, I would hope that the company provides D&A expense for the period, since that is a crucial for unlevered free cash flow calculation. The big missing pieces are working capital changes and capital expenditures. For working capital, you could assume net working capital as a % of sales and then calculate the YOY change., However, given the lack of historical balance sheet numbers, we really have no idea what that % should be. Perhaps try to look at similar public companies and calculate an average/median for net working capital as a % of sales.

In terms of cap ex, I would first ask the company for numbers. If they are unable to provide numbers, I would probably just set it equal to D&A, which would essentially be assuming run rate capital expenditures.

 

DCF - CF = does not work. Use another metric that you do have. Sales/Rev is a common metric used in biotech or medtech companies, particularly if they are pre-profitability (and even post).

You could also build an options or probability chain to hone in on expected revenue, cash flow and earnings.

http://www.realoptions.org/papers1999/Kellogg.pdf

 

What I don't understand is where these expected numbers come from. How can you accurately estimate something without any information, or any breakthrough products? I never understood this.. Sorry

"An investment in knowledge pays the best interest." - Benjamin Franklin
 

Sorry last thing. I think this is what I am getting from the top half of what you said, but just want to clarify..

Can I make a comps list of around 5 or so most relative public comps and get EV/Sales multiples for each of them, and derive a current median EV/Sales number for the group. Than apply that multiple to my company's sales to get its current EV, and then work backwards to calculate Equity Value? (I need to calculate equity value as well). Not sure if that is a respectable method, but this makes sense to me and seems right, but also I skimmed through that website you provided (thanks btw) and the model used for this technique seems extremely scientific compared to what I just explained.

"An investment in knowledge pays the best interest." - Benjamin Franklin
 
ValueAdder68:

Sorry last thing. I think this is what I am getting from the top half of what you said, but just want to clarify..

Can I make a comps list of around 5 or so most relative public comps and get EV/Sales multiples for each of them, and derive a current median EV/Sales number for the group. Than apply that multiple to my company's sales to get its current EV, and then work backwards to calculate Equity Value? (I need to calculate equity value as well). Not sure if that is a respectable method, but this makes sense to me and seems right, but also I skimmed through that website you provided (thanks btw) and the model used for this technique seems extremely scientific compared to what I just explained.

Yes. Students need to stop fucking around with DCFs (speaking from personal experience) and learn that multiples are more accurate at determining valuation. Vanilla DCFs are worthless in the real world.

And before someone says something, obviously the multiples method has its flaws. But, if your DCF is telling you something is worth $100 and the market multiples indicate it is worth $25, chances are buyers are going to gravitate much more towards the $25. Nobody likes to overpay and comps are used in various aspects of finance/life, not just M&A (i.e. real estate, rent, mortgage rates, credit scores, etc.).

Sorry for the rant, it was at the posters in general, not you specifically.

And the only way to have more detailed info to project out Sales, CF, etc. is industry knowledge and using the Company's mgmt forecasts. To what degree those are valuable depends on the company and CFO/controller.

 

You have to make cash/sales projections at the different stages of the approval process. Obviously, the probabilities change over time but what the poster said above about the probability chain is best. Very few of private biotech firms make money so really it comes down to evaluating whether a drug will get approval. Focus on drug approvals.

 

Also interested.

FWIW, from what I understand, private valuations are pretty much put together by the person who actually wants the number. I.e., you'd do your own valuation using whatever method is appropriate. I think Damodaran has some slides up on how to do it. You can derive numbers from comparable companies and plug that in with the rest of your (hopefully well-researched) drivers.

in it 2 win it
 

Yea there is place to get private company financial: PrivCo . I use it daily. It costs money to subscribe but I think reasonable and if anything under-priced. But you mentioned spotify and they had full on balance sheet income statement everything on Spotify when I looked up in Oct/Nov on privco. Don't know anything else...when I was on wall street at big BB firm we had Data Resources Group that I'm sure had access to every database (sometimes it took 8 hours to get my answer, meaning I was waiting there at work all night for it) but at a big BB bank they have internal Data Resources open 24/7 (for better or worse). For boutique firm, or where I am know in VC, you have to do alot of research work yourself even as a partner. So that's what I use and can't do without it.

If you're at BB firm asap when you need private company financials submit request to data resources HOURS before you need it (you can always pull the request later but get in the queue)

 

Depending on how highly regarded your employer is, and how reliable the valuations are considered to be, you're probably in good shape for a VC/PE shop. Seems to me that skill would be slightly less useful at a hedge fund.

 

Cum architecto aperiam temporibus rerum. Iste non enim est illum. Quis est consequuntur corporis ducimus rem magnam. Distinctio sit blanditiis enim similique sit aperiam rem.

Est aut quibusdam nam porro. Sequi labore inventore mollitia esse. Nam dolor harum pariatur ut.

Array
 

Unde eligendi rerum earum dolores. Et omnis omnis sed placeat vel magni et. Veritatis eum eos consequuntur expedita quia autem voluptates. Distinctio non debitis quia.

Culpa porro ipsa alias quam minus. Itaque tempora architecto enim aliquam doloremque omnis. Distinctio adipisci qui odit ea. Numquam est omnis voluptates hic deleniti aut tenetur. Sit unde magni est voluptatem ut nam minima. Aliquid suscipit blanditiis ut deserunt. Delectus earum modi iure possimus in.

Totam quo saepe nihil sint vel. Cum ab itaque perferendis vero aut et eligendi nam.

 

Est in delectus est aut aut ipsum minima. Expedita est voluptatum pariatur cumque quos quis magni. Fugit cum et rerum. Asperiores et enim distinctio aliquid et ab.

Voluptatibus ratione sequi ullam facilis vero. Et maiores deleniti libero. Eum et earum et similique temporibus. Molestiae suscipit sit debitis autem. Similique est omnis similique possimus amet vitae.

Sit voluptas dolorem perspiciatis beatae maiores et dolorum ut. Et numquam ducimus quo ex nam. Maxime nemo blanditiis vel et.

Career Advancement Opportunities

March 2024 Investment Banking

  • Jefferies & Company 02 99.4%
  • Goldman Sachs 19 98.8%
  • Harris Williams & Co. (++) 98.3%
  • Lazard Freres 02 97.7%
  • JPMorgan Chase 03 97.1%

Overall Employee Satisfaction

March 2024 Investment Banking

  • Harris Williams & Co. 18 99.4%
  • JPMorgan Chase 10 98.8%
  • Lazard Freres 05 98.3%
  • Morgan Stanley 07 97.7%
  • William Blair 03 97.1%

Professional Growth Opportunities

March 2024 Investment Banking

  • Lazard Freres 01 99.4%
  • Jefferies & Company 02 98.8%
  • Goldman Sachs 17 98.3%
  • Moelis & Company 07 97.7%
  • JPMorgan Chase 05 97.1%

Total Avg Compensation

March 2024 Investment Banking

  • Director/MD (5) $648
  • Vice President (19) $385
  • Associates (86) $261
  • 3rd+ Year Analyst (13) $181
  • Intern/Summer Associate (33) $170
  • 2nd Year Analyst (66) $168
  • 1st Year Analyst (202) $159
  • Intern/Summer Analyst (144) $101
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

1
redever's picture
redever
99.2
2
BankonBanking's picture
BankonBanking
99.0
3
Betsy Massar's picture
Betsy Massar
99.0
4
Secyh62's picture
Secyh62
99.0
5
kanon's picture
kanon
98.9
6
DrApeman's picture
DrApeman
98.9
7
dosk17's picture
dosk17
98.9
8
GameTheory's picture
GameTheory
98.9
9
CompBanker's picture
CompBanker
98.9
10
Jamoldo's picture
Jamoldo
98.8
success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”