I’m hurriedly on a valuation piece for a small tech / app entity (bolt on to human capital... pretty unique) using dcf and comparables and I’m pretty lost on what to do.
I have a huge discrepancy in valuation: 10MM GBP (comparables/transactional) vs 50MM GBP per dcf which looks ridiculous but I’m pretty sure there aren’t errors in terms of computations. Any excuses to give as to possibly justify this thing a little? Any other methods of valuation metrics that you guys use on a small, tech recruitment AI that is not precluded by the negative EBITDA / NI?
Thanks everyone!
I found the memos of this investment company quite interesting: https://www.saas-capital.com/resources/
They published several memos on valuation, forecasting, cost of capital, etc.
In my opinion comps are very difficult in tech. Valuation depends heavily on client retention, addressable market, IP protection, etc. Most listed companies are much larger than the company you are looking at (because they score well on the factors I list above). Would stick to DCF.
I am assuming that in your DCF you have a terminal growth rate of +5%. Try to only use this when you have a growth rate of below 5% otherwise your terminal value will be well over 80% of your PV, hence your dcf is way to sensitive to other assumptions and not accurate.
For small tech firms multiples are frequent. Look at both financial metrics (Sales if making a loss, adjusting the EBITDA for non recurring items such as dev costs etc) and non financial metrics. Even some listed firms report non financial multiples (check out Salando earnings for instance).
Thanks for the answer. These multiples based approaches (rather than the DCF) seem to be very subjective and mull over somewhere in the region and pluck a value depending on what the previous deals have been at.
Are there no methods to concretely calculate a multiple in deriving the EV?
Pan European Monkey is correct, doing a DCF with 5% growth rate will get you 80% of EV from Terminal Value. At that rate, you might as well not forecast anything and just assume 5% growth rate from LTM FCF. You'll get the same number.
If your multiples are plucked out of thin air then you are doing the entire thing wrongly. There is no difference between a DCF and a multiple. A multiple is just a DCF you have hidden behind some layers of assumptions. To see this, remember that your standard DCF formula in per share terms is
Price = FCF/(r-g) - Net Debt
Divide both sides by earnings and you get
P/E = (FCF/E)/(r-g) - ND/E
So your P/E ratio is dependent on forward assumptions you are making about cash flow generation (FCF/E), WACC (r), perpetuity growth (g) and leverage (ND/E). When you look for comparable companies, you are trying to find companies which are similar in these four fundamental ways. It is not the case that you conjure them out of the sky.
(1) What's your projected horizon in the DCF? Should be projecting quite far away, 10 - 15 years. What's your current terminal growth vs your growth in the last projected year? What's your capex vs d&a assumptions, WC? (2) What WACC are you using? (3) Are targets in the precedent comps analysis comparable to what you are valuing? What growth rates do they have? Size? Do you use EV/EBITDA? If so, what's their EBITDA margin, growth etc? (4) If you are using trading comps, again can you really compare your set with what you are valuing? At what stages of the maturity cycle are companies in?
I don't see your spreadsheet but I'd basically double check comparability of the comps set and correctness of the assumptions behind your DCF
Hi,
These are the probably some tricky answers...
1) This is a start up and reliable projections are not available: they have been going under significant growth but still making losses at the EBITDA line. There is no capex, no d&a as it is more or less a (B2B) app. Only relevant lines at WC are cash (which is not their business model) adjustments - they have no debt that you would adjust the CL by.
2) WACC is calculated using comps of different Human Capital apps (very very scarce data). Premium / Discounts have not been added - I don't know where I'd start on this given the company model / industry...
3) As per (1), only comps i can use are revenue multiples. Theese saas b2b apps are more or less very new industry (especially only to human capital) and big players still make losses. I had to readjust to saas market in general but since our Company is making negative EBITDA - and you cannot calculate EV of these comparables in any data platforms given their novelty. Perhaps the most well known firm in the space is Coople or Syft - 0 data on them.
4) As per (3)...
Any solutions?? Ridiculous isn't it?
Oh, forgot to mention that the WC, because of its cash implications, return all-negative-figures up to their last projected FY in 2024. Fun fun
BigHuddz,
1) Keep in mind that GAAP does not allow R&D expenses to be capitalized, but for all intents and purposes R&D is a capital expense at a tech firm that will provide economic benefits over a multiyear period. Be sure to capitalize R&D and estimate an appropriate amortization period. You can add this R&D expense back to operating income (less amortization), which may or may not make your EBITDA positive. Keep in mind that this will also raise your capex needs which reduces FCF, so its not like the firm is completely off the hook.
2) If its high growth, it can be reasonably assumed that the capital structure will be almost entirely equity. You may need to build a bottoms-up beta to get an accurate picture of cost of equity. Depending on how many years you are projecting out, you may want to consider shifting the capital structure to be more in line with industry average (for ex. in personal electronics, the average cap structure is 91.5% equity and 8.5% debt) when calculating terminal value.
You can also capitalize operating leases, which function just like debt and should be discounted to NPV using pre-tax cost of debt and added to debt when calculating WACC weightings.
3) Look at forward multiples if trailing are still negative. Capitalize R&D for your comps to see if that makes EBITDA positive. If not, you may have to just extrapolate based off the TAM.
DCF is a bad tool for early stage, high growth companies.
Here is a decent write-up on how SaaS companies are valued:
https://techcrunch.com/2016/10/07/determining-the-worth-of-your-saas-co…
Thank you . I've just had a read - do you agree with the supposed 'universal discount' of 1.3 for considering public to private companies?
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