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HOW TO ESTIMATE PRIVATE COMPANY VALUE AND RATE A PROSPECT WITH THE INFORMATION
David LambConsultant, Target Analytics
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
CLOSELY HELD STOCK
WHY VALUE A COMPANY? Reasons to value a private company:
To measure progress To sell it To raise capital from investors For a management buyout For estate planning For an employee stock ownership plan For taxation
The value of a company is influenced by the reason you’re asking the question
Change the purpose of the valuation and you change the stock price
Only fundraisers ask how it affects a gift
VALUATION IN THE REAL WORLD Fair market value is what a willing buyer will
pay a willing seller when neither is under pressure
Information typically is not available on private companies
To find out what a company is worth, sell it Sometimes D&B provides a net worth figure Read everything you can about your target
company – it’s not just numbers
VALUATION IN THE REAL WORLD Value depends on 3 factors
How much cash it generates today Expected growth in cash in the foreseeable future The return buyers require for their investment
Companies with a negative cash flow can have a high value
Companies with a positive cash flow might have a modest value
Current interest rates influence value Inverse relationship between interest trend and value
trend – similar to bond markets Investors compare return on other investments to
return on investment in the private company
TARGET COMPANY
Iconic bookstore with three locations in a major metropolitan area
Annual sales are about $20 million per IAC Company Intelligence
Incorporated in 1973 Report lists 5 named officers Prospect is the CEO and founder No % of ownership is reported
WAYS TO MEASURE VALUE Book value Price/earnings ratio (P/E) Discounted cash flow Comparison to similar companies
of known value Multiple: Known value/known annual sales Apply the multiple to target company’s
sales
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
COMPARISON TO PUBLIC COMPANIES Yahoo Stock Screener (
http://screen.yahoo.com/stocks.html) Parameters that can be used
Industry (SIC or NAICS) Sales
Enter relevant info for the target company SEC.gov company search allows SIC
search If you don’t know the SIC, check
http://www.osha.gov/pls/imis/sicsearch.html If your search turns up no companies, try
replacing the right-hand numbers with zero’s: 5943 becomes 5940 or 5900
Once you know the company name, look it up on your favorite public company site (e.g. finance.yahoo.com)
COMPARISON CONSIDERATIONS Market Capitalization is one good measure of public
company value Enterprise Value, if offered, can be better -
incorporates debt and cash into the equation Your target company value is probably considerably
less, even if otherwise equivalent Public companies tend to be much larger than their
private counterparts Ratio of annual sales to value provides a “multiple”
for the relevant industry The more examples the better 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
COMPARISON TO OTHER PRIVATE CO.S Business Valuation Resources (
www.bvmarketdata.com) Pratt’s 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 $625
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 $425
INC. Magazine’s Ultimate Valuation Guide
INC.’S 2008 VALUATION GUIDE
Premium Zone
Discount Zone
Med
ian
Sale
Pri
ce
Median Annual Sales
INC.’S 2008 VALUATION GUIDEM
edia
n Sa
le P
rice
Median Annual Sales
INC.’S 2008 VALUATION TABLES
BIZSTATS RULES OF THUMB
http://www.bizstats.com/reports/valuation-rule-thumb.asp
PULLING IT ALL TOGETHER Company sales are reported to be $20
million The one classified found for a bookstore
supports a high ratio of value to sales Public companies in the same industry
have a sales to value ratio ranging from .14 - .40
Inventory is unknown, but classified add suggests a possible inventory to sales ratio of 37.5%
Best guess of inventory: 37.5% x $20 MM = $7.5 MM
Company sales are reported to be $20 million
The one classified found for a bookstore supports a high ratio of value to sales
Public companies in the same industry have a sales to value ratio ranging from .14 - .40
Inventory is unknown, but classified add suggests a possible inventory to sales ratio of 37.5%
Best guess of inventory: 37.5% x $20 MM = $7.5 MM
ALTERNATE CALCULATIONS
Using similar public company comparison (middle valuation is 22% of sales) $4.4 MM
Using Inc. Valuation Guide for retail trade (43% of sales) $8.6 MM
Using BizStats (15% of sales + inventory) $7.5 MM Inventory $3.0 MM 15% of sales $10.5 MM Total
IRS WEALTH STATISTICS
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
11.0%
14.0%
9.0%
17.0%
13.0%
9.0%
15.0%
10.0%
3.0%
Distribution of assets across net worth
Households with a net worth of $1.5M-$10M, 2004 IRS data, published in 2008[2] Includes cash and cash management accounts.
[3] Includes all government bonds, bonds issued by corporations and foreign governments, mortgages and notes, cash value life insurance, and diversified mutual funds.
[4] Includes Individual Retirement Accounts, annuities, and self-employed or Keogh plans.
[5] Includes non-corporate businesses, farms, and limited partnerships.
RATING THE PROSPECT Assume 50% ownership for the prospect who
founded the company more than 30 years ago Alternative valuations:
Ownership stake would be between $5.25 MM (BizStats) $4.3 MM (Inc. Guide) $2.2 MM (Comparable public companies) Comparable company for sale supports high ratio Reasonably conservative guess could be $2MM
Per IRS, closely held stock is 9% of net worth – make it 1/10 for easy calculation
10 x $2 MM = $20 MM estimated net worth Prospect’s philanthropic capacity could be 2-5% of
estimated net worth 2% x $40 MM = $400,000 5% x $40 MM = $1 MM
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
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
