Valuations and the use of equity WBS Entrepreneurship Mentoring Programme Simon Chapman 30 March 2012www.burgisbullock.com...
Introduction to Burgis & Bullock  Midlands firm of accountants and business advisers.  Clients include entrepreneurs, ow...
Speaker profile  Corporate finance partner at Burgis & Bullock.  17 years in M&A  Experience at Ernst & Young, Baker Ti...
How would you value……..www.burgisbullock.com     3
Key questions before you start a valuation  What am I valuing?  Why am I valuing it?  For whom am I doing this valuatio...
Reasons to carry out a valuation  Fiscal valuations  Dispute resolution  Commercial valuations  Financial reportingwww...
Fiscal valuations  Share option schemes  Probate and inheritance tax purposes  Trust and estate planning  Group re-str...
Dispute resolution  Shareholder disputes and exits  Compulsory share transfers  Companies Act 2006  Divorce  Litigati...
Commercial valuations  Mergers and acquisitions  Disposals  MBOs and MBIs  IPOs  Capital reconstructions  Lender sec...
Why does the reason for the valuation matter?                           Open Market Value          Fiscal           Case...
Ways of representing value              Market            Investing            Operating             approach           ap...
Theoretical underpinning of a valuation                      Expected                   future earnings                   ...
Main valuation methods  Asset value  Capitalisation of earnings  Mixed methods  Discounted cash flow  Industry “rules...
Asset value  Valuation of individual asset components  Book value v adjusted book value  Liquidation value  Entry cost...
Capitalisation of earnings  Comparable quoted companies  Precedent transactions  Maintainable earnings  Comparability ...
Mixed methods  Operating approach  Net assets plus value of goodwill  Goodwill based on excess returns from invested ca...
Discounted cash flow  Early stage / pre-profit ventures  Mature and predictable businesses  Theoretically sound, but di...
Industry “rules of thumb”  Very common in practice  Ultimately derived from DCF and comparables – but are   the base ass...
Risk/reward models  Investor’s target return  Forecasting risk  Exit risk/assumptions  Impact of gearing  Impact of s...
Key methods preferred by investors  Capitalisation of earnings – based on precedent   transactions  Risk/reward models ...
Quoted company comparables  Selecting the peer group  Liquidity and marketability discounts  Control premia and minorit...
Quoted company comparables Case study 2  Privately owned specialist nuclear engineering business  Turnover of £14m and E...
Quoted company comparables Case study 2                                                                                   ...
Quoted company comparables Case study 2           35.0                             y = 50.523x + 2.5518                  ...
Precedent transactions  Key method used in commercial transactions including   fund raisings and MBOs  Determining the e...
Precedent transactions  Reported profit – EBITDA, EBITA, EBIT, PBT etc?  Historical, current or prospective – ensure con...
Precedent transactions  Large and general population of comparables  Small and focused comparator group  Accessing the ...
Precedent transactions BDO Private Company Price Index 20 15                                                              ...
Precedent transactions  How to deal with a range of multiples  Focus on the true comparators  Averaging is rarely the b...
Risk/reward models  Is it a valuation method?  Variant of a DCF model  Based on target investor returns  Reliant on co...
Valuing and using shares  Valuations: economic, tax and practical considerations  Using shares for acquisitions  Using ...
Valuing your shares  Market value  Minority discounts  Restricted shares  Will the recipients attach the same value as...
Using shares for acquisitions  Powerful way to grow through acquisition  Valuation issues with unlisted shares  Exit/re...
Valuing your shares Case study 3  Target business generating £2m EBIT on sales of £10m  Approached by acquiror – offer a...
Valuing your shares Case study 3  Acquiror’s view:        Combined group has EBIT of £4.6m        Enlarged group would ...
Valuing your shares Case study 3  Seller’s view:        Acquiror should be rated at 6.5x – the same as target        Th...
Using shares with employees  Why….to save money or attract, retain and motivate?  Is it appropriate to your industry and...
Using shares with suppliers  Which suppliers would value your shares?  Valuation issues  Conflict issues  Restrictions...
Using shares with customers  Recruitment and loyalty tool  Will your customers value them?  Shared equity schemes  Cas...
Different classes of shares and their use  Ordinary shares  Preferred ordinary shares  Preference shares  Redeemable s...
Conclusion  Triangulate your valuations using several methods  Thorough analysis of inconsistent benchmarks  Beware of ...
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Simon Chapman - WBS Entrepreneurship Mentoring Programme - Final Workshop

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How to value your company and the use of equity.

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Simon Chapman - WBS Entrepreneurship Mentoring Programme - Final Workshop

  1. 1. Valuations and the use of equity WBS Entrepreneurship Mentoring Programme Simon Chapman 30 March 2012www.burgisbullock.com 0
  2. 2. Introduction to Burgis & Bullock  Midlands firm of accountants and business advisers.  Clients include entrepreneurs, owner-managed businesses, corporates, and private equity backed companies.  Specialist corporate finance practice.  Valuations for M&A deals, dispute resolution, tax purposes, and estate planning.www.burgisbullock.com 1
  3. 3. Speaker profile  Corporate finance partner at Burgis & Bullock.  17 years in M&A  Experience at Ernst & Young, Baker Tilly, and in industry  Valuations for M&A transactions, divorces, shareholder disputes, and fairness opinions  Panel of experts of the President ICAEWwww.burgisbullock.com 2
  4. 4. How would you value……..www.burgisbullock.com 3
  5. 5. Key questions before you start a valuation  What am I valuing?  Why am I valuing it?  For whom am I doing this valuation?  As at what date is the valuation?www.burgisbullock.com 4
  6. 6. Reasons to carry out a valuation  Fiscal valuations  Dispute resolution  Commercial valuations  Financial reportingwww.burgisbullock.com 5
  7. 7. Fiscal valuations  Share option schemes  Probate and inheritance tax purposes  Trust and estate planning  Group re-structurings  Capital Gains Tax  Employment Related Securitieswww.burgisbullock.com 6
  8. 8. Dispute resolution  Shareholder disputes and exits  Compulsory share transfers  Companies Act 2006  Divorce  Litigation  Share purchase agreementswww.burgisbullock.com 7
  9. 9. Commercial valuations  Mergers and acquisitions  Disposals  MBOs and MBIs  IPOs  Capital reconstructions  Lender security assessments  Raising new financewww.burgisbullock.com 8
  10. 10. Why does the reason for the valuation matter?  Open Market Value Fiscal  Case law valuations  Minority discounts  Valuation date and perspective  Market Value v Fair Value  Articles of Association and other agreements Dispute  Case law resolution  Minority discount v quasi partnerships  Valuation date and perspective  Freedom to use any method Commercial  Typically based on whole firm purchase valuations  Forward looking  Special purchaser valuewww.burgisbullock.com 9
  11. 11. Ways of representing value Market Investing Operating approach approach approach Net working capital Value of net interest bearing debt Value of net Market value of tangible assets the business / invested capital (enterprise value) Value of identifiable intangible assets Value of equity Goodwillwww.burgisbullock.com 10
  12. 12. Theoretical underpinning of a valuation Expected future earnings or cash flows Fair or market value… What will someone pay Risk of the given these facts? Timing of earnings or the earnings cash flows or cash not flows materialisingwww.burgisbullock.com 11
  13. 13. Main valuation methods  Asset value  Capitalisation of earnings  Mixed methods  Discounted cash flow  Industry “rules of thumb”  Risk/reward models  Other methods, e.g. optionswww.burgisbullock.com 12
  14. 14. Asset value  Valuation of individual asset components  Book value v adjusted book value  Liquidation value  Entry cost  Bank security  Net realisable value  Low risk / underpins other valuation methodswww.burgisbullock.com 13
  15. 15. Capitalisation of earnings  Comparable quoted companies  Precedent transactions  Maintainable earnings  Comparability adjustments  Historical v prospective ratios  Availability of datawww.burgisbullock.com 14
  16. 16. Mixed methods  Operating approach  Net assets plus value of goodwill  Goodwill based on excess returns from invested capital  In practice, goodwill usually derived as a multiple of turnover or profitswww.burgisbullock.com 15
  17. 17. Discounted cash flow  Early stage / pre-profit ventures  Mature and predictable businesses  Theoretically sound, but difficult in practice  Forecasting risks  Variability of financial assumptions  Determining the WACC / discount rate  Case study 1www.burgisbullock.com 16
  18. 18. Industry “rules of thumb”  Very common in practice  Ultimately derived from DCF and comparables – but are the base assumptions still valid?  Per unit basis, e.g. nursing homes  Turnover multiples, e.g. accountancy practices  Per user basis, e.g. internet businesseswww.burgisbullock.com 17
  19. 19. Risk/reward models  Investor’s target return  Forecasting risk  Exit risk/assumptions  Impact of gearing  Impact of share structuring and different share rightswww.burgisbullock.com 18
  20. 20. Key methods preferred by investors  Capitalisation of earnings – based on precedent transactions  Risk/reward models  Asset basis and “rules of thumb” may be used as secondary methods to underpin core methods  Discounted cash flow rarely used in practicewww.burgisbullock.com 19
  21. 21. Quoted company comparables  Selecting the peer group  Liquidity and marketability discounts  Control premia and minority discounts  Differential size and growth characteristicswww.burgisbullock.com 20
  22. 22. Quoted company comparables Case study 2  Privately owned specialist nuclear engineering business  Turnover of £14m and EBIT of £1.8m  Forecast profit growth of 15% per annum over next 3 years  Approached by listed company  How would you value based on listed comparators?www.burgisbullock.com 21
  23. 23. Quoted company comparables Case study 2 Market Enterprise capitalisation Net debt value Historic Forecast Company Activities £m £m £m EBIT x CAGR Engineering products and services for the mining, oil & gas, nuclear & defence, power Weir Group generation and water treatment sectors. 1363 7 1370 10.5 9% Engineering services for the oil & gas, nuclear, defence, food,safety & security and Redhall Group transportation sectors. 54 -1 53 28.8 44% Marine services and the provision of the James Fisher & Sons engineering services to the nuclear industry. 306 74 380 18.6 28% Support services Group operating in regulated Babcock International indutries including defence and energy 1297 74 1371 16.0 31% Specialist construction, nuclear engineering and Renew Holdings land remediation 68 -9 59 11.5 18% VT Group Defence and support services company 806 93 899 8.1 15% Average 15.6www.burgisbullock.com 22
  24. 24. Quoted company comparables Case study 2 35.0 y = 50.523x + 2.5518  Implied valuation of 30.0 R² = 0.8986 £18m 25.0 20.0  Negotiations with EV/EBIT trade buyer 15.0 terminated 10.0 5.0  MBO at £16m completed 0.0 0% 10% 20% 30% 40% 50% 60% EBIT CAGRwww.burgisbullock.com 23
  25. 25. Precedent transactions  Key method used in commercial transactions including fund raisings and MBOs  Determining the earnings / profit figure  Population of comparable deals  Assessing the final valuation figure or rangewww.burgisbullock.com 24
  26. 26. Precedent transactions  Reported profit – EBITDA, EBITA, EBIT, PBT etc?  Historical, current or prospective – ensure consistency  Maintainable/normalised profits:  Exceptional items  Shareholder remuneration  Non-business costswww.burgisbullock.com 25
  27. 27. Precedent transactions  Large and general population of comparables  Small and focused comparator group  Accessing the deal information  Reported v true deal statistics – using databases  Earn-outs, deferred consideration and partial exitswww.burgisbullock.com 26
  28. 28. Precedent transactions BDO Private Company Price Index 20 15 FT non-financials PCPI 10 5 Q1 Q4 Q4 Q3 Q4 Q2 Q4 Q1 Q4 Q4 Q3 Q4 Q2 Q1 Q4 Q4 Q4 2005 2005 2006 2007 2007 2005 2006 2008 2008 2009 2010 2010 2008 2009 2011 2011 2011www.burgisbullock.com 27
  29. 29. Precedent transactions  How to deal with a range of multiples  Focus on the true comparators  Averaging is rarely the best approach  Understand the outlierswww.burgisbullock.com 28
  30. 30. Risk/reward models  Is it a valuation method?  Variant of a DCF model  Based on target investor returns  Reliant on company forecasts – subjectivity areas  Capital gain drives the return – impact of assumed exit multipleswww.burgisbullock.com 29
  31. 31. Valuing and using shares  Valuations: economic, tax and practical considerations  Using shares for acquisitions  Using shares for employees  Using shares with suppliers  Using shares with customerswww.burgisbullock.com 30
  32. 32. Valuing your shares  Market value  Minority discounts  Restricted shares  Will the recipients attach the same value as you to shares?  Practical issueswww.burgisbullock.com 31
  33. 33. Using shares for acquisitions  Powerful way to grow through acquisition  Valuation issues with unlisted shares  Exit/realisation options for recipients of shares  Post deal restrictions / lock-in arrangementswww.burgisbullock.com 32
  34. 34. Valuing your shares Case study 3  Target business generating £2m EBIT on sales of £10m  Approached by acquiror – offer at £13m  Sale multiple of 6.5x  Consideration split £10.5m cash and £2.5m in shares  Acquiror generates EBIT of £2.6m on sales of £21m  What % of the enlarged group should the vendor shareholders have?www.burgisbullock.com 33
  35. 35. Valuing your shares Case study 3  Acquiror’s view:  Combined group has EBIT of £4.6m  Enlarged group would merit valuation of 8x  Therefore, enlarged group worth £36.8m  So, £2.5m investment equates to 7%  Is this reasonable?www.burgisbullock.com 34
  36. 36. Valuing your shares Case study 3  Seller’s view:  Acquiror should be rated at 6.5x – the same as target  Therefore, acquiror worth £16.9m pre deal  Post deal value of £19.4m  So, share investment of £2.5m equates to 13%  What happened?www.burgisbullock.com 35
  37. 37. Using shares with employees  Why….to save money or attract, retain and motivate?  Is it appropriate to your industry and employees?  Shares v options  Approved and unapproved share options  EMI options  Protections and restrictionswww.burgisbullock.com 36
  38. 38. Using shares with suppliers  Which suppliers would value your shares?  Valuation issues  Conflict issues  Restrictions and control  Keep the equity tightwww.burgisbullock.com 37
  39. 39. Using shares with customers  Recruitment and loyalty tool  Will your customers value them?  Shared equity schemes  Case study 4: Unichem  Regulatory issueswww.burgisbullock.com 38
  40. 40. Different classes of shares and their use  Ordinary shares  Preferred ordinary shares  Preference shares  Redeemable shares  Deferred shares  Flowering shares  Founder or golden shareswww.burgisbullock.com 39
  41. 41. Conclusion  Triangulate your valuations using several methods  Thorough analysis of inconsistent benchmarks  Beware of simplistic methodologies  Don’t rely on mathematical models – use judgement and knowledge of key value drivers  Equity is your most valuable assetwww.burgisbullock.com 40

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