This document provides an overview and primer on business valuation. It begins with introductory information and disclaimers. It then discusses the concept of value versus price. Several frameworks for valuation are presented, including total shareholder return analysis. An example valuation of a company called Ideko is provided, using comparable company analysis and discounted cash flow valuation. Assumptions and forecasts are presented for Ideko's financials including sales, costs, capital expenditures, debt, and cash flows. The analysis indicates the $150 million purchase price for Ideko may be too high based on the estimated $100 million equity valuation.

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 
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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
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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
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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
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19. This work is licensed under a Creative Commons AttributionNonCommercial-ShareAlike 4.0 International License.
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Notices:
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A Primer on Biz Valuation version: 15/12/2013 10:46
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