Private Company Valuation Flashcards
(34 cards)
What are 5 company specific factors that are most relevant for valuation purposes for private vs public companies? SSCLP
- stage life cycle (private companies typically early stage of development)
- size (private company’s tend to be smaller)
- concentrated ownership (private companies are majority owned by founders)
- limited disclosures (public companies required to disclose financial information, private aren’t required too)
- pressure from short-term investors (private companies focus on long-term growth while public short-term)
What are 3 stock specific factors that are most relevant for valuation purposes for private vs public companies? ICP
- illiquid shares (private company shares is illiquid)
- concentrated control (private companies controlled by one or few investors)
- potential sales restrictions (private companies can restrict ability for owners to sell their shares)
What are 3 categories in which private companies valuation can be categorized based on what they are related to? TCL
- transaction related
- compliance
- litigation
What are 7 transaction related purpose of private company valuation?
- venture capital financing (early stage):
- private equity financing (growth or buyout stage)
- debt financing
- initial public offering
- acquisitions and divestitures
- bankruptcy
- share based payment (compensation)
What are 2 compliance related purpose of private company valuation?
- financial reporting
- tax reporting
What are 2 litigation related purpose of private company valuation?
- corporate disputes
- shareholder disputes
What is formula for enterprise value and formula for FCFF using in enterprise value formula?
enterprise value = (FCFF / (1 +WACC)^i)) + (terminal value / (1 + WACC)^n))
original formula = (FCFF / (1 +WACC)^i)) + (FCFF/WACC-g) * (1/1+WACC)^n
FCFF = EBITDA * (1-t) + depreciation - change in long term assets - change in working capital
When calculating enterprise value for a private company what are 3 adjustments usually needed?
- earnings normalization: formula for FCFF is different
- discount rate/ rate of return adjustments: WACC needs adjustments for private companies since WACC is usually used for public companies using CAPM
- valuation discount or premium: due to the illiquidity a premium is usually added
What is the difference between buyout funds and growth funds?
- buyout funds: raise large amounts of debt to finance highly leveraged acquisitions of public companies, buying all of their shares to take them private
- growth funds: typically take minority stakes in rapidly growing companies with a view to exiting these positions at a higher valuation
What is the difference between compiled financial statements and reviewed financial statements?
-compiled financial statements: basic statements and doesn’t include any insurance from auditors
- review financial statements: statements accompanied by auditors letter
When valuing a private company why do analyst need to make adjustments to normalize earnings and cash flows?
- compiled and reviewed financial statements do not necessarily provide an accurate picture of what a private company’s operations would be like after an acquisition
What are 3 cash flow estimation issues for private companies?
- Estimates of FCFE will depend on whether an investor is seeking to become a majority owner or taking a minority stake (ownership perspective)
- Private companies are generally subject to higher levels of uncertainty (uncertainty)
- Managers of private company managers generally know much more about the business than outside analysts, managers may be inclined to bias their results (knowledge of information)
What is formula for WACC?
WACC = wdrd * (1-t) + were
wd = weight of debt
rd = rate of debt
t = tax rate
we = weight of equity
re = rate of equity
What is formula for cost of equity using CAPM?
re = rf + B(Rm - Rf)
re = cost or rate of equity
rf = risk free rate
b = beta
rm = return on market
What is formula for cost of equity using extended CAPM?
re = rf + B(Rm - Rf) + small cap stock premium + company specific stock premium
re = cost or rate of equity
rf = risk free rate
b = beta
rm = return on market
What is formula for cost of equity using build up method?
re = rf + B(Rm - Rf) + small cap stock premium + company specific stock premium + industry premium/discount
re = cost or rate of equity
rf = risk free rate
rm = return on market
b = beta is assumed 1
What are the 2 types of investors for private company valuation?
- strategic buyers: a company or investor that seeks to acquire companies or assets, whose acquisition will add synergistic value to their existing portfolio
- financial buyers: attracted by a private company’s fundamentals and are willing to pay a control premium in order to establish a majority ownership position
What is discount for lack of control vs discount for lack of marketability?
- investors who are only seeking a minority ownership position will offer a share price that reflects a discount for lack of control (DLOC)
- if the sale agreement includes conditions that restrict the buyer’s ability to sell their shares in the future, the price will reflect a discount for lack of marketability (DLOM)
What is formula for lack of control discount and for DLOC and DLOM combined?
DLOC = 1 - (1/1+ control premium)
DLOC = discount for lack of control
total discount = 1 - ((1-control discount)*(1-marketablity discount))
What are the 3 major approaches to private company valuation? IMA
- income approach (discount present value of expected cash flows)
- market approach (relative value approach by comparing multiples to share price)
- asset based approach (value of assets - value of liabilities)
What is formula for free cash flow valuation method under income based approach?
Intrinsic value = (FCFF / (1+WACC)^i) + (terminal value / (1+WACC)^n)
What is the formula for enterprise value for capitalized cash flow method under the income based approach?
enterprise value = FCFFk+1/ WACC - g = (EBITk+1 * (1 - t) * (1 - RIR)) / (WACC - g)
RIR = reinvestment rate
What is formula for reinvestment rate (RIR)?
RIR = g / WACC
g = constant growth rate
WACC = weighted average cost of capital
What is the formula for equity value for capitalized cash flow method under the income based approach, and what is the capitalization rate?
equity value = FCFEk+1 /re -g
Re = required return on equity
g = constant growth rate
FCFE = free cash flow to equity
capitalization rate = re -g
