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A primer on biz valuation - The subtle science and precise art of valuation
A primer on biz valuation - The subtle science and precise art of valuation
A primer on biz valuation - The subtle science and precise art of valuation
A primer on biz valuation - The subtle science and precise art of valuation
A primer on biz valuation - The subtle science and precise art of valuation
A primer on biz valuation - The subtle science and precise art of valuation
A primer on biz valuation - The subtle science and precise art of valuation
A primer on biz valuation - The subtle science and precise art of valuation
A primer on biz valuation - The subtle science and precise art of valuation
A primer on biz valuation - The subtle science and precise art of valuation
A primer on biz valuation - The subtle science and precise art of valuation
A primer on biz valuation - The subtle science and precise art of valuation
A primer on biz valuation - The subtle science and precise art of valuation
A primer on biz valuation - The subtle science and precise art of valuation
A primer on biz valuation - The subtle science and precise art of valuation
A primer on biz valuation - The subtle science and precise art of valuation
A primer on biz valuation - The subtle science and precise art of valuation
A primer on biz valuation - The subtle science and precise art of valuation
A primer on biz valuation - The subtle science and precise art of valuation
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A primer on biz valuation - The subtle science and precise art of valuation

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I did a short workshop on business valuation for my MBA classmates - using the Berk and DeMarzo Chapter 19 materials.

I did a short workshop on business valuation for my MBA classmates - using the Berk and DeMarzo Chapter 19 materials.

Published in: Economy & Finance, Business
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  • 1. A Primer on Biz Valuation The subtle science and precise art of valuation Presented to @ImperialBiz FT MBA Cohort 2013/14 Original poster drawn by: @zenpencils (aka Mr Gavin Aung Than) Photography by: @izamryan
  • 2. Thank you! If you liked today’s efforts, then all I ask is that you endorse me for my efforts on LinkedIn  1. 2. 3. 4. 5. 1 Login to your LinkedIn account Check out my public LinkedIn page at http://uk.linkedin.com/in/izamryan Add me! Endorse me  If you are feeling particularly generous – please write me a ―Recommendation‖, see me and I can send you a link to the Recommendation service. A Primer on Biz Valuation version: 15/12/2013 10:46 izamryan@gmail.com | http://relevancefound.blogspot.com
  • 3. BUT FIRST: A DISCLAIMER! I am “just” a practitioner – not an academic 2 A Primer on Biz Valuation version: 15/12/2013 10:46
  • 4. “Price is what you paid. Value is what you get.” Warren Buffett 3 izamryan@gmail.com | http://relevancefound.blogspot.com
  • 5. So why bother at all with Business Valuation in an MBA context? Because it is a way to describe Competitive advantage If you only remember one thing from today, please let it be this derivation of Enterprise Value • Growth ‒ Environment • NOPLAT ‒ Operational efficiency ‒ Scale / scope of business ‒ Acquisitive ‒ Organic • Return on Invested Capital • WACC ‒ Financing decision ‒ Gearing and leverage ‒ Risk vs Return ‒ Suffers from competitive decay over time 4 A Primer on Biz Valuation version: 15/12/2013 10:46 izamryan@gmail.com | http://relevancefound.blogspot.com
  • 6. OK so if “Value” is so great – how do people use this concept in the real world? One way is to analyse something called “Total Shareholder Returns”. In the M&A field this is quite important and this is the framework I’ve always applied TSR = Capital Gains Present Value of all future cash flows to shareholders from now onwards Today’s shareholder value 5 + Dividends Dividends Paid Out Based on expectation for: • Revenue growth • Operating margin • Asset efficiency A Primer on Biz Valuation version: 15/12/2013 10:46 Present Value of all future cash flows to shareholders from the future date onwards Capital Gain only exists if business outperforms expectations for: • Revenue growth • Operating margin • Asset efficiency Future shareholder value izamryan@gmail.com | http://relevancefound.blogspot.com
  • 7. OK – lets look at the Ideko case – Berk & DeMarzo Chapter 19 6 A Primer on Biz Valuation version: 15/12/2013 10:46
  • 8. The deal on the table is  buyout Ideko for $150m Is this reasonable? Income statement US$000 Sales Cost of goods sold Raw materials Direct labour costs Gross profit Sales and marketing Administrative FY05 75,000 (16,000) (18,000) 41,000 With Net Income of $6.9m the buyout is at a 21.6x PE multiple $150m price / $6.939m net income = 21.6 PE multiple. (11,250) (13,500) EBITDA Depreciation 16,250 (5,500) EBIT Interest expense (net) 10,750 (75) Pretax Incom e Income tax 10,675 (3,736) Net incom e Gross profit margin Sales & Marketing as % of sales Administrative as % of sales EBITDA margin 6,939 54.7% (15.0)% (18.0)% 21.7% So urce: M anagement info rmatio n 7 A Primer on Biz Valuation version: 15/12/2013 10:46 izamryan@gmail.com | http://relevancefound.blogspot.com
  • 9. Let’s get a sense check by checking “Comps” Comparables (aka Guideline Transaction Multiples) Ideko P/E Ratio EV/Sales EV/EBITDA EBITDA / Sales 21.6 2.0 9.1 21.7% Valuing Ideko based on: Earnings --> P/E Ratio Debt per balance sheet add: surplus cash 6,939 (4,500) 6,500 Net debt balance for EV calculation Sales --> EV/Sales EBITDA --> EV/EBITDA 2,000 75,000 16,250 Oakley Luxottica 24.8 2.0 11.6 17.0% 28.0 2.7 14.4 18.5% Nike Average 18.2 1.5 9.3 15.9% Min Max 20.3 1.4 11.4 12.1% 18.2 1.5 9.1 15.9% 28.0 2.7 14.4 21.7% 140,862 126,290 194,292 107,000 187,250 114,500 149,875 204,500 236,000 vs. Current offer price $150m So urce: M anagement info rmatio n Comparing different Equity valuations 250,000 200,000 150,000 100,000 50,000 - Earnings multiple EV/Sales Min 8 EV/EBITDA Max A Primer on Biz Valuation version: 15/12/2013 10:46 izamryan@gmail.com | http://relevancefound.blogspot.com
  • 10. This is an LBO … Our offer of $150m is levered through new bank borrowings Sources and uses of funds Sources New term loan Excess cash PKK Equity investment (balance) Uses 100,000 Purchase equity 6,500 Repay existing debt 53,000 Advisory fees 150,000 4,500 5,000 159,500 159,500 So urce: M anagement info rmatio n $150m was our offer to Ideko Which we funded through $100m new debt that will be in Ideko’s balance sheet. And our PE Fund’s ―stake‖ will be the $53m balance 9 A Primer on Biz Valuation version: 15/12/2013 10:46 izamryan@gmail.com | http://relevancefound.blogspot.com
  • 11. Sense-check forecasts early and often! Sales and Operating cost assumptions Annual FY05 FY06P FY07P FY08P FY09P FY10P Terminal Sales Market grow th (y-o-y) Market share 5.0% 1.0% 10,000 10.0% 10,500 11.0% 11,025 12.0% 11,576 13.0% 12,155 14.0% 12,763 15.0% Projected sales units Average sales price ($/unit) 2.0% 1,000 75.0 1,155 76.5 1,323 78.0 1,505 79.6 1,702 81.2 1,914 82.8 75,000 88,358 103,234 119,777 138,149 158,526 16.0 18.0 16.2 18.7 16.3 19.5 16.5 20.2 16.6 21.1 16.8 21.9 15.0% 18.0% 35.0% 16.5% 15.0% 35.0% 18.0% 15.0% 35.0% 19.5% 14.0% 35.0% 20.0% 13.0% 35.0% 20.0% 13.0% 35.0% Projected sales Cost of goods sold Raw materials ($/unit) Direct labor costs ($/unit) Operating expenses Sales & marketing (% of sales) Administrative (% of sales) Tax rate 1.0% 4.0% 1,500 units per year = 50% more than current production We need to be sensitive to whether current production facilities will be sufficient to cater to forecast growth. 35.0% So urce: M anagement info rmatio n 10 A Primer on Biz Valuation version: 15/12/2013 10:46 izamryan@gmail.com | http://relevancefound.blogspot.com
  • 12. Account for the increased capex needed to grow the business Capital expenditures US$000 FY05 FY06P FY07P FY08P FY09P FY10P Fixed assets and Capex Opening book value Capital investment Depreciation 50,000 5,000 (5,500) 49,500 5,000 (5,450) 49,050 5,000 (5,405) 48,645 20,000 (6,865) 61,781 15,000 (7,678) 69,102 8,000 (7,710) Closing book value 49,500 49,050 48,645 61,781 69,102 Capex is a bit lumpy Be practical – it’s going to come in drips and drabs over the years 69,392 So urce: M anagement info rmatio n 11 A Primer on Biz Valuation version: 15/12/2013 10:46 izamryan@gmail.com | http://relevancefound.blogspot.com
  • 13. All that capex needs to be paid for … somehow! Debt and interest payments US$000 Debt and interst paym ents Outstanding debt Interest FY05 100,000 6.8% So urce: M anagement info rmatio n 12 A Primer on Biz Valuation version: 15/12/2013 10:46 FY06P FY07P FY08P FY09P FY10P 100,000 (6,800) 100,000 (6,800) 115,000 (6,800) 120,000 (7,820) 120,000 (8,160) Reflect on financing of capex Be sensitive to how the capex is going to be financed izamryan@gmail.com | http://relevancefound.blogspot.com
  • 14. Working capital management US$000 Based on FY05 Forecast Working capital cycle Accounts recievable Raw materials Finished Goods Minimum cash balance Sales revenue Raw materials costs Raw materials + Labor costs Sales revenue 90.0 45.0 45.0 30.0 Direct labour + Admin costs Raw materials + S&M Working capital cycle Cash flow re: Change in w orking capital So urce: M anagement info rmatio n 13 A Primer on Biz Valuation version: 15/12/2013 10:46 (15.0) (45.0) 150.0 105.0 FY08P FY09P FY10P 18,493 1,973 4,192 6,164 14,525 1,534 4,967 7,262 16,970 1,775 5,838 8,485 19,689 2,039 6,815 9,845 22,709 2,329 7,911 11,355 26,059 2,646 9,138 13,030 28,288 33,067 38,388 44,304 50,872 (1,294) (3,360) (1,433) (4,099) (1,695) (4,953) (1,941) (5,938) (2,211) (6,900) (2,570) (7,878) (5,532) (6,648) (7,879) (9,110) (10,448) 26,168 22,756 26,419 30,509 35,194 40,425 3,412 (15.0) (45.0) FY07P (4,654) Wages payable Other accounts payable FY06P 30,822 60.0 30.0 45.0 30.0 FY05 (3,663) (4,089) (4,685) (5,231) How will the new owners improve the biz? 45 days reduction is big – that’s a $3m cash flow improvement in FY06P izamryan@gmail.com | http://relevancefound.blogspot.com
  • 15. We end up with a Pro-Forma income statement Income statement US$000 Sales Cost of goods sold Raw materials Direct labour costs FY05 FY06P FY07P FY08P FY09P FY10P 75,000 88,358 103,234 119,777 138,149 158,526 (16,000) (18,000) (18,665) (21,622) (21,593) (25,757) (24,808) (30,471) (28,333) (35,834) (32,193) (41,925) 41,000 48,071 55,883 64,498 73,982 84,407 (11,250) (13,500) (14,579) (13,254) (18,582) (15,485) (23,356) (16,769) (27,630) (17,959) (31,705) (20,608) EBITDA Depreciation 16,250 (5,500) 20,238 (5,450) 21,816 (5,405) 24,373 (6,865) 28,393 (7,678) 32,094 (7,710) EBIT Interest expense (net) 10,750 (75) 14,788 (6,800) 16,411 (6,800) 17,508 (6,800) 20,715 (7,820) 24,383 (8,160) Pretax Incom e Income tax 10,675 (3,736) 7,988 (2,796) 9,611 (3,364) 10,708 (3,748) 12,895 (4,513) 16,223 (5,678) 6,939 5,193 6,247 6,960 8,382 10,545 54.7% (15.0)% (18.0)% 21.7% 54.4% (16.5)% (15.0)% 22.9% 54.1% (18.0)% (15.0)% 21.1% 53.8% (19.5)% (14.0)% 20.3% 53.6% (20.0)% (13.0)% 20.6% CAGR EBITDA It’s all about forecasting EBITDA 53.2% (20.0)% (13.0)% 20.2% Gross profit Sales and marketing Administrative Net incom e Gross profit margin Sales & Marketing as % of sales Administrative as % of sales EBITDA margin 16.1% 15.5% 14.6% Notice here we take Depreciation off afterwards. That means it’s not included in S&M or Admin costs So urce: M anagement info rmatio n 14 A Primer on Biz Valuation version: 15/12/2013 10:46 izamryan@gmail.com | http://relevancefound.blogspot.com
  • 16. Which we can then discount. With this Equity valuation of $100m … are we getting a good deal by paying $150m? Discounted cash flow valuation US$000 FY06P FY07P FY08P FY09P 5,193 4,420 6,247 4,420 6,960 4,420 8,382 5,083 10,545 5,304 Unlevered net income Plus: Depreciation Net w orking capital Capital expenditures 9,613 5,450 3,412 (5,000) 10,667 5,405 (3,663) (5,000) 11,380 6,865 (4,089) (20,000) 13,465 7,678 (4,685) (15,000) 15,849 7,710 (5,231) (8,000) 16,689 Free Cash Flow to the Firm Plus: Net borrow ing Less: After-tax interest 13,475 (4,420) 7,409 (4,420) (5,845) 15,000 (4,420) 1,458 5,000 (5,083) 10,328 (5,304) 10,876 9,055 2,989 4,735 1,375 5,024 290,020 5.3% 9.1% 0.917 0.841 0.771 0.707 0.648 0.648 206,759 8,303 2,513 3,652 972 3,258 188,061 Net income Plus: after tax interest FY05 6,939 Free cash flow to equity Grow th rate Discount rate & factors NPV / Present values Less: Debt Add back: cash Equity Value FY10P Terminal (2,143) (3,678) (120,000) 13,030 99,789 So urce: M anagement info rmatio n 15 A Primer on Biz Valuation version: 15/12/2013 10:46 izamryan@gmail.com | http://relevancefound.blogspot.com
  • 17. THANK YOU! 16 A Primer on Biz Valuation version: 15/12/2013 10:46
  • 18. References • • Berk & DeMarzo – Corporate Finance Valuation – Koller, Goedhart, Wessels and McKinsey & Company Harvard Business Review (HBR) published a wide range of supporting articles underpinning the approach described in this presentation • • • • • • ―Want to Create Value?‖ by Copeland, Strategic Finance Mar 2002 ―If Private Equity Sized Up Your Business‖ by Pozen, HBR Nov 2007 ―What's Your Real Cost of Capital?‖ by McNulty, Yeh, Schulze, and Lubatkin, HBR Oct 2002 ―What's It Worth?: A General Manager's Guide to Valuation‖ by Luehrman, HBR May 1997 "A Real-World Way to Manage Real Options" by Copeland, HBR, Mar 2004 ―Best Practice Guidelines Governing Analyst/Corporate Issuer Relations‖, CFA Institute and National Investor Relations Institute 2004 • ―Communicating Strategy to Financial Analysts‖ by Kuperman, HBR Sep 2002 17 A Primer on Biz Valuation version: 15/12/2013 10:46 izamryan@gmail.com | http://relevancefound.blogspot.com
  • 19. This work is licensed under a Creative Commons AttributionNonCommercial-ShareAlike 4.0 International License. You are free to: Share — copy and redistribute the material in any medium or format Adapt — remix, transform, and build upon the material The licensor cannot revoke these freedoms as long as you follow the license terms. Under the following terms: Attribution — You must give appropriate credit, provide a link to the license, and indicate if changes were made. You may do so in any reasonable manner, but not in any way that suggests the licensor endorses you or your use. NonCommercial — You may not use the material for commercial purposes. ShareAlike — If you remix, transform, or build upon the material, you must distribute your contributions under the same license as the original. No additional restrictions — You may not apply legal terms or technological measures that legally restrict others from doing anything the license permits. Notices: You do not have to comply with the license for elements of the material in the public domain or where your use is permitted by an applicable exception or limitation. No warranties are given. The license may not give you all of the permissions necessary for your intended use. For example, other rights such as publicity, privacy, or moral rights may limit how you use the material 18 A Primer on Biz Valuation version: 15/12/2013 10:46 izamryan@gmail.com | http://relevancefound.blogspot.com

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