Business Valuation and Company Valuation

During quite some time, the site has contained a small business valuation and an advanced business appraisal. These two valuation methods have been great for people with little experience of business valuation. We have long striven to explain the underlying methods in these two formulas more extensively for those who want to perform own valuation analysis. It has today become real! And we are proud of presenting the four valuation methods below:

Valuation methods now on business valuation.net

Tags: Comparable Companies Analysis, DCF Valuation, LBO Valuation, Precedent Transaction Valuation

• Valuation

Almost done… But first we need to make the exit assumptions. We use the same EBITDA multiple as when we bought it 6.7 times EBITDA (see input below).

Output

The LBO valuation is done. Below are the results for our example company:

Understanding the results

1. We paid 7 million in equity on the entry date
2. We will get 17 million cash when we sell the company in five years (during these five years we have paid interest on the debt and amortized 100% of the initial debt)
3. This implies an internal rate of return of 17%
4. We have doubled our initial equity stake 2.36 (ROIC) times during this period
5. Some financial ratios are also supplied in the output

Other Valuation methods

1. DCF Valuation
2. LBO Valuation
3. Comparable Companies Valuation
4. Precedent transaction Valuation

External guides and resources

Tags: EBITDA %, Exit assumptions, Internal Rate of Return, ROIC

• LBO Valuation

In this step we shall try to make forecasts of growth and profitability.

Steps

1. Go to the tab Scenario in the excel spread sheet
2. The first red circle is around the text “active case 1″. This option determines which scenario to use. 1 is normal case and 2 is the downside case
3. Make assumptions of annual sales growth in the base case and in the downside case
4. Enter the predicted EBITDA margin for each year. You can either make own predictions for each year, or use same margins throughout the forecast period. We have used an average of the last five years 16.4%.

Output

Now, you have almost made all needed assumptions. See picture below:

Step 4 >>

Tags: Downside Case, Financials, Future Forecast, Positive Case

• LBO Valuation

In this step you shall enter historic financials of sales and EBITDA margins.

Deal inputs

Steps

1. Enter sales, EBITDA and taxes

Step 3 >>

Tags: EBITDA %, Sales, Taxes

• LBO Valuation

If you have not yet downloaded the LBO model, it is time to do so, here is the link: LBO model template.

Deal inputs

Steps

1. USES: Enter the acquisition price, in this example we were offered to but this company for 17.5 million which implied a 6.7 EV/EBITDA multiple
2. INPUT: What leverage will your acquisition have? We have chosen to lend 4 times EBITDA, which is a moderate level. In our example, this implies 60% of total uses implying that we need to add 7 million equity in order to fund this LBO.
3. Enter the interest rate at which you can borrow money at. We got a 6% rate when we asked the bank
4. Input CAPEX in relation to sales. If you do not know, look at historical values found in the annual report
5. Enter NWC (Net working capital) in percentage of sales. Look at historical values if you do not know

Step 2 >>

Tags: Capex, Deal Value, Enterprise Value, EV/EBITDA, LBO model, Leverage, Leveraged Buy Out Valuation

• LBO Valuation

With this sensitivity analysis you can see how the valuation changes with different assumptions and changes in input.

This is our sensitivity analysis:

Comments

To perform a sensitivity analysis like this, you should copy the exact value of your WACC, EBITDA %, Perpetuity Growth and annual sales growth in the middle of each row and column. The numbers that you should replace are dark blue and bold.

Valuation Range

It is now time to decide the valuation range for the company. In the example valuation we decide the range by changes in WACC with 1% up and one percent down which gives a range between approximately 5 000 – 6 000!

Other Valuation methods

1. DCF Valuation
2. LBO Valuation
3. Comparable Companies Valuation
4. Precedent transaction Valuation

External guides and resources

Tags: Annual Sales Growth, EBITDA %, Perpetuity Growth, Valuation Range, WACC

• DCF model

The DCF valuation is almost done, you have made all the inputs required and the enterprise value is already calculated. Now we will try to describe the results and make sensitivity analysis.

Below are the results in our valuation example:

Comments

In the results above you can see the enterprise value of the business and some multiples on the 2010 years estimated results. You should also enter debt, cash and outstanding shares to get additional information on your valuation.

Step 10 >>

Tags: Enterprise Value, EV/EBITDA, EV/SALES, Implied Equity Value, Net Debt, Present Value of Cash Flow

• DCF model

The terminal value has the largest impact on the valuation and it is extremely important that this input is correct performed.

Most values are already given as can be seen below:

Steps

1. Perpetuity growth rate is the rate at which the economy is expected to grow, this is normally 2.5% or 3%
2. Make sure the implied exit multiple isn’t too high, since that probably means your assumptions are too aggressive in the terminal year. Another way of “judging” if this value is too high, is if you put it in the relation of the later calculated enterprise value. If the terminal value is more than 80% of the enterprise value, it is likely that something is wrong with your assumptions

Step 9 >>

Tags: Enterprise Value, Implied Exit Multiple, Perpetuity Growth Rate

• DCF model

Next step is to calculate the present value of the generated cash flows in the projection period.

Steps

1. Make sure the WACC is correct according to step 6
2. The Discount Period is set according to the mid year method and could be leaved as is since the cash flow is evenly generated through the year
3. The Discount Factor is calculated with WACC and the chosen Discount Period
4. The present value of the free cash flow is now automatically generated/li>

Step 8 >>

Tags: Discount Factor, Discount Period, FCF, Free Cash Flow, Present Value

• DCF model

This section is for you who have access to a database such as Bloomberg or Reuters. If you do not have such access, you can type in:
Debt to Total Capitalization: 30%
Equity to Total Capitalization: 70%
This is the most common assumption when determining capital structure in a business valuation model. However, the below described method is more accurate and preferred if you have all the needed tools.

The picture describes the input we have made in our example valuation, which is further described below:

Assumptions and input

1. Identify a couple of listed companies that are similar to the one that you want to estimate business value upon
2. Enter the listed companies beta which can be found via a database such as Bloomberg
3. Enter the Market Value of debt of these companies. The market value of debt is the same as book value of debt
4. Enter the market cap for the traded peers
5. Enter the marginal tax rate
6. All this information can be found in the database. Now the model will calculate the Beta and unlevered and levered Beta and put as input in the valuation model

Step 6 >>

Tags: Beta, Business Valuation Model, Capital Structure, Debt to Equity ratio, Market cap, Market Value of Debt, Relevered Beta, Unlevered Beta

• Valuation