Valuation Exercise
Comparables/Multiples
Often DCF(discounted cash flow) approaches to valuation are unattractive because of the subjective nature of the CF estimates. In industries where "standard" Valuation multiples are available, they are an alternative to DCF analysis. Consider the following:
The owner of a start-up needs to establish a favorable valuation for her business in order to attract external investment on "favorable" terms. The company's last year of operation was relatively successful, but enhanced projected value creation is essential to finding the right deal. The company operates in an industry where valuation for harvest or sale events is typically based on EBIT or EBITDA multiples. A number of recent transactions have established valuations (or prices) at an average rate of 5-7 times EBITDA. The owner/entrepreneur has established a MINIMUM valuation of $ 22,500,000 as being necessary to support $ 2,500,000 in new financing on acceptable terms. Last Year's Income Statement was as follows:
SALES 11,550,000
VC 6,300,000
CM 5,250,000
FC 3,225,000
DEPN 900,000
EBIT 1,125,000
Sales are projected to increase next year but the need to create additional capacity is expected to cause an increase in FC to $4,100,000 while deductible Depreciation Expense will drop to $610,000.
a.Assuming investors have access to the "comparable" transaction data, how will they value the company for an investment TODAY, and WHY? What Sales level is necessary to Owners minimum (floor) value?
b.If the owners project Sales to grow 60% next year, what value would they probably place on the company, and WHY?
c.If valuation is the starting (and sometimes the ending) point of investment negotiations, suggest some alternatives to strict adherence to their separate valuations if the parties want to move ahead. (Consider some of the principles mentioned in the Ted Wang video)