Private Company Valuation

Private Company Valuation David Lamb Prospect Research Consultant Blackbaud Analytics

Agenda Business

101 Valuation concepts Tools for valuation Making it practical for fundraising

Business 101

Closely held stock  When

a company incorporates, it issues shares, known as “outstanding stock”  The value of the company is divided evenly among the shares  “Publicly held” stock vs. “closely held”  Finding the value of public company stock is easy  Finding the value of private company stock is difficult and expensive

Why value a company?  The

value of a company is influenced by the reason you’re asking the question  Reasons to value a private company:  To

sell it  To raise capital from investors  Part of a divorce settlement  For a management buyout  For estate planning  For an employee stock ownership plan  For taxation

 Change

the purpose of the valuation and you change the stock price  Only fundraisers ask how it affects a gift

What is it worth?  What

is a company worth?

 It’s

worth the tangible assets  It’s worth the assets + goodwill  It’s worth whatever someone will pay for it  Situations

that increase the value:

A

great product or service that people want to buy  Customers who can afford to buy it  Situations  An

that decrease the value:

obscure product or service with limited appeal  Price is too high or customers are too poor

Valuation Concepts

Valuation in the real world  Information

typically is not available on private companies  The value of a company is not necessarily identical to the bottom line on the balance sheet  Companies with a negative cash flow can have a high value  Companies with a positive cash flow might have a modest value

Valuation in the real world  To

find out what a company is worth, sell it  Value is partly (sometimes mostly) subjective  Sometimes D&B provides a net worth figure  Read everything you can about your target company – it’s not just numbers

Various ways to measure value Book

value Price/earnings ratio (P/E) Discounted cash flow Comparison to similar companies

Comparable companies  Find

a similar public company

 Downside:

a public company is almost always valued higher than an otherwise equivalent private company would be

 Find

a similar private company that sold recently  Downside:

the only commonly available metric is sales, and value is not always clearly tied to sales or even profit

 Comparison

is only method that is possible if you have no access to the financial statements and appraisals of the assets is comparable companies

Valuation Tools

Comparison to public companies

 Yahoo

Stock Screener (http://

screen.yahoo.com/stocks.html)

 Parameters  Industry

that can be used

(SIC or NAICS)

 Sales

 Enter

relevant info for the target company  Look for Market Cap.  Your target company value is probably considerably less

 Your

Comparison considerations

prospect’s industry and company sales rarely match those offered by Yahoo perfectly  Public companies tend to be much larger than their private counterparts  Read the profile to see if the comparison company is similar in purpose to the target  If the public company has flat or negative earnings, it may still have value  Same may be true of the private company

Comparison to other private cos  Business  Pratt’s

Valuation Resources (www.bvmarketdata.com)

Stats

 Database

of over 9,500 private company sales from 1990 to present  Deal price ranges from $1 million to $14.4 billion  Updated monthly with about 100 transactions added / month  $595  Bizcomps  Database

of over 9,500 private company sales from 1993 to present  61% of the companies have gross revenues less than $500K  18% of the companies have gross revenues over $1 million  $395

 INC.

Magazine’s Ultimate Valuation Guide

INC.’s 2006 Valuation Guide

INC.’s 2006 Valuation Guide

BizStats.com Select

the industry Enter the sales Many elements of the cash flow statement are shown including an estimate of retained earnings

BizStats.com rules of thumb

Type of Business

"Rule of Thumb" valuation

Accounting Firms

100% - 125% of annual revenues

Auto Dealers

2-3 years net income + tangible assets

Book Stores

15% of annual sales + inventory

Coffee Shops

40% - 45% of annual sales + inventory

Dental Practices

60% - 70% of annual revenues

Dry Cleaners

70% - 100% of annual sales

Engineering practices

40% of annual revenues

Florists

34% of annual sales + inventory

Food/Gourmet Shops

20% of annual sales + inventory

Furniture & Appliance Stores

15% - 25% of annual sales + inventory

Gas Stations

15% - 25% of annual sales + equip/inventory

Gift & Card Shops

32% - 40% of annual sales + inventory

Grocery Stores

11% - 18% of annual sales + inventory

Business classifieds BizBuySell GlobalBX Search

for business by line of business and state

Making it practical

Case Situation  Privately

owned grocery chain (2 stores) in Nebraska  Founded in 1955  405 employees  D&B reports sales of $45.8 million  200,000 square feet  No trend information is available  Major competition is a Super WalMart, recently arrived  Prospect is the son of the deceased founder

Using valuation guides  INC.

Guide

 Median

sales for grocery stores: $773M  Median sale price: $200M  Valuation multipliers: Best:

4.47 Second and third best: 0.27  BizStats

Guideline

 11-18%

of annual sales + inventory

Using valuation guides  Estimates

using INC:

 Sales

of the target are well below the median, encouraging us to consider a lower estimated value  Using the second best multiplier: 0.27 $46 million = $12.42 million  Estimate  11%

using BizStats rules of thumb

of sales ≈ $5 million + inventory  18% of sales ≈ $8.2 million + inventory

Business classifieds  BizBuySell  No

(search on 9/12/06)

grocery stores found in Nebraska  Widened the search to include surrounding states  Results:

BizBuySell 1

BizBuySell 2

BizBuySell 3

Estimated Company Value Summary    

Target company sales: $46 million Based on classifieds found, the target company is larger than most in the region Known, but smaller stores are asking the low 6figures BV Resources (aka INC valuation guide) value:    



BV Resources multiplier  

 

Median revenue = $773 million Low sales price = $14 million Median sales price = $200 million High sales price = $1.6 billion 4.47*$46 million =$205.6 million 0.27*$46 million = $12.4 million

D&B reported net worth: $6.9 million Biz Stats rule of thumb for grocery stores = $5 million to 8.2 million + inventory

Estimated Value The

target company is worth

$300,000-600,000 $2,000,000-10,000,000 $10,000,000-20,000,000 Over

$50,000,000 None of the above I haven’t got a clue

Making sense of it all  The

problem of company valuation is the same as for personal net worth: you can’t get the necessary information  The good news: you don’t need to pin down the precise value  You’d like to know:  If

it’s $1M vs $100M  If it’s a going concern  If the industry is above or below the diagonal on the INC chart.

Making sense of it all Distribution of a sse ts a cross ne t w orth 20.0% 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0%

19.0%

11.0%

17.0%

12.0% 8.0%

7.0%

9.0%

8.0%

8.0%

Households with a net worth of $1-$10 million, 2001 IRS data, published in 2006

If the prospect owns 50%  Assume

a company value of between $2 million and $10 million  The prospect’s share in the target company could be between  $5M

(50% of $10 M) and  $1M (50% of $2 M)  Let’s split the difference at $3 million

 Reduce

the proportions of net worth (from the IRS chart) for property and stock because of the semi-rural area  This makes closely held stock a higher percentage of the prospect’s net worth – say 25%

If the prospect owns 50% Net

worth could be about $12 million (private company ownership of $3 million x 4) 2%-5% might be philanthropic capacity Capacity ≈ $240,000$600,000

Consolidated resource list        

Yahoo! Stock Screener: screen.yahoo.com/stocks.html BV Resources: www.bvmarketdata.com Inc. Valuation Guide: www.inc.com/valuation/index.html BizStats: www.bizstats.com BizBuySell: bizbuysell.com GlobalBX: www.globalbx.com www.lambresearch.com White Paper www.blackbaud.com/resources/white-papers.aspx