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GBQ Consulting - BV Overview
- 1. Business Valuation BootCamp Curtis A. Farrow, CPA, MBA Senior Financial Analyst, Valuation Services (720) 839-6130 [email protected]
- 2. Agenda 2 • Introduction& Reasons for a Valuation •What is Value? • Valuation Principles & Methodologies
- 3. Business Valuation BootCamp Introduction & Reasons for a Valuation
- 4. What is BusinessValuation? • Business Valuation involves estimating/appraising the value of a business or business interest • Business valuation analysis is a surrogate for public market • Business valuation is most prevalent in hard-to-value assets such as stock in privately held businesses • BV is analogous to real estate appraisal 4
- 5. When are ValuationsNeeded? 5
- 6. “Magnificent Seven” Questionsto Ask when Selecting a Valuation Advisor 1. What % of your career is dedicated to BV (100% is the correct answer) and how many BV professionals are on your staff? 2. How many BVs have you/your firm completed? 3. How many BVs for this purpose have you/your firm completed? 4. Professional certifications related to BV (e.g., CFA, ASA, ABV)? 5. Have you given presentations/written articles on BV? 6. Can I have references from former clients, advisors, etc.? 7. Fee structure and expected turnaround time 6
- 7. Typical Valuation Process 1.Scoping Out the Engagement • Confirm Purpose/Standard of Value/Valuation Date • Fee Quote/Timing • Complexity/Intended Audience 2. Review & Analyze Requested Information • Business and Industry • Historical/Projected Financial Performance 3. Due Diligence Meetings/Management Interviews 4. Select & Apply Appropriate Valuation Methodologies 5. Present Conclusions 7
- 8. Business Valuation BootCamp What is Value?
- 9. What Standard ofValue? Liquidation Value • “Fire sale” of assets; lowest type of value Fair Market Value • The price at which an asset would change hands between a willing buyer and a willing seller, when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties being able, as well as willing, to trade and well- informed about the asset and the market for the asset. • Assumes a financial buyer…no acquirer synergies are considered • This is the typical definition for regulatory purposes (e.g., IRS, DOL, etc.) Strategic Value • Value to strategic buyer, considering add-backs, synergies, etc. • Value is buyer-specific (i.e., different buyers will have different perceived values) 9
- 10. Enterprise Value vs.Equity Value Enterprise Value the value of the business as a whole; may be viewed as: • Total invested capital (equity + debt – cash) Equity Value = Enterprise Value – Debt + Cash • Represents shareholder value (i.e., stock value) • Zero-sum game: $1 more of debt = $1 less of equity • Analogous to home value less mortgage 10
- 11. Business Valuation BootCamp Valuation Principles & Methodologies
- 12. Valuation Methodologies Asset Approach •Going Concern • Liquidation Income Approach • Multiple-Period Discounting Method (e.g., discounted cash flow) • Single-Period Capitalization Method (e.g., capitalized cash flow) Market Approach • Guideline Public Company Method • Guideline Transaction (M&A) Method 12
- 13. Overview of ValuationPrinciples Valuation Must be Forward-Looking •Must consider anticipated future performance •Historical performance may help predict the future Future Cash Flow is Key Driver of Value •Future cash flow is king •Must consider risk in realizing projected cash flow Factors Considered in Valuations •Historical and expected future performance & trends •Market multiples of comparable companies and transactions •Economic, industry, and company-specific factors 13
- 14. Asset Approach Overview Premise:The value of a business can be estimated based on the value of its underlying assets and liabilities Adjust ALL assets and liabilities to FMV • Must include booked and un-booked assets and liabilities • Must include tangible and intangible assets and liabilities When is the Asset Approach Most Appropriate? • Generally appropriate for holding companies or asset- intensive companies with modest profitability • Generally less appropriate for profitable operating entities 14
- 15. Income Approach Overview Premise:The value of a business can be estimated based on the present value of the future economic benefits it generates Steps in performing the income approach: • Select & Determine Earnings Stream • Develop Appropriate Required Rate of Return • Select & Apply Multi-Period or Single-Period Model 15
- 16. Preferred Earnings Stream:Distributable Cash Flow Normalized After-Tax Net Income + Depreciation and Amortization - Capital Expenditures +/- Additional Net Working Capital Requirements = Distributable (Debt-Free) Cash Flow 16
- 17. Required Rate ofReturn An investor’s required ROR is a function of the perceived risk & potential of the investment Cost of Equity (ke) = Rf + (ERP x β) +/- Company- specific risk factors WACC = ke*%e + kd*%d Match Cash Flow with Rate of Return: • Cash Flow Available to Debt & Equity – Use WACC • Cash Flow Available to Equity Only – Use Cost of Equity 17
- 18. Selecting a Model:Discounted Cash Flow vs. Capitalized Cash Flow Multiple-Period Models (e.g., discounted future cash flow) are often far more appropriate because: • Can account for anticipated changes in the business such as growth rates, margins, upcoming investments, business strategies, etc. Single Period Models: • Only appropriate if growth in future cash flows is projected to be constant • Difficult to rely on single-period models during times of turbulent economic conditions and/or volatile company performance 18
- 19. Year 1 Year2 Year 3 Year 4 Year 5 Distributable Net Cash Flow 5,000,000$ 5,500,000$ 5,940,000$ 6,296,400$ 6,611,220$ Present Value Factor @ 18.0% 0.9206 0.7801 0.6611 0.5603 0.4748 Present Value of Distributable Cash Flow 4,602,873$ 4,290,814$ 3,927,186$ 3,527,811$ 3,139,154$ Present Value of Cash Flows (Years 1 to 5) 19,487,838$ Year 5 Cash Flow 6,611,220$ Present Value of Residual Cash Flow 25,354,703 Multiplied by: 1 + Growth Rate 1.05 Residual Cash Flow 6,941,781 Enterprise Value 44,842,541 Discount Rate 18.0% Rounded 44,800,000$ Less: Residual Growth Rate -5.0% Capitalization Rate 13.0% Residual Cash Flow Value 53,398,315 Present Value Factor 0.4748 PV of Residual Cash Flow 25,354,703$ Discounted Cash Flow Example 19
- 20. Market Approach Overview Premise:The value of a business can be estimated based on comparisons to similar businesses Guideline Public Company Method • Stock market is the best and most accurate source of valuation data; it is the source of rate of return data in income approach • Compare fundamentals of subject company and peer group of publicly traded companies • Apply pricing multiples (e.g., price-to-earnings, enterprise value- to-EBITDA, etc.) of publicly traded comparable companies Guideline Transaction Method • Identical to public company approach, except use transaction multiples from M&A deals as basis for valuation • Information about each transaction is typically limited since deals often involve private companies 20
- 21. Guideline Public CompanyMethod Example 21 Closing Stock Price (12/31/07) ABC 5.00$ x 45.52 = 227.6$ + 221.8$ - 108.4$ = 341.0$ 8.5 9.3 0.42 DEF 25.50 x 22.18 = 565.6 + 305.8 - 78.4 = 793.0 7.4 8.6 0.34 GHI 38.75 x 31.54 = 1,222.2 + 751.8 - 45.0 = 1,929.0 10.7 13.1 0.75 JKL 8.00 x 18.95 = 151.6 + 0.0 - 3.6 = 148.0 6.2 7.8 0.33 MNO 9.50 x 24.64 = 234.1 + 18.5 - 8.4 = 244.2 5.4 6.4 0.55 PQR 18.25 x 41.84 = 763.6 + 106.9 - 24.7 = 845.8 6.8 8.5 0.68 STU 14.00 x 35.72 = 500.1 + 247.9 - 7.4 = 740.6 5.7 7.4 0.42 VWX 11.50 x 65.90 = 757.9 + 1,085.2 - 222.1 = 1,621.0 9.5 13.8 0.81 YZ 22.75 x 45.52 = 1,035.6 + 333.6 - 26.9 = 1,342.3 7.1 8.9 0.59 Low 25% 6.2 7.8 0.42 Median 7.1 8.6 0.55 High 25% 8.5 9.3 0.68 Variation 23.8% 26.9% 32.7% Selected Multiple 6.5 8.1 0.45 Subject Company Results 6.7 5.1 89.6 Suggested Value 43.55 41.31 40.32 Concluded Enterprise Value: $42,000,000 EV / EBITDA EV / EBIT EV / Sales Pricing Multiples Debt & Preferred Stock Cash and Equivalents Enterprise Value (EV)Co. Derivation of Enterprise Value Shares Outstanding (millions) Market Value of Equity (mil)
- 22. • Valuations shouldconsider all methodologies and utilize the appropriate ones; income and market approaches are most common with strong, profitable companies • Valuation opinions supported by multiple valuation methods are preferable, more defensible, and often lead to more stable, accurate, and sustainable valuation levels Valuation Methodologies Guideline Public Company Method Discounted Cash Flow Method Net Asset Value Method Guideline Transaction Method Valuation Conclusion 22
- 23. Key Valuation Concept:Valuation is Forward- Looking 23 “It’s tough to make predictions, especially about the future.” -Yogi Berra