1. Boot Camp 1
Entrepreneurship Boot Camp
“Running the Numbers”
Jim Nolen
Fin 394 – Harvest, Finance & Negotiation

2. Boot Camp 2
Entrepreneurship Boot Camp
1. If you do not have a strong accounting and
finance background, find a study group with
members who do, as much of the case
study method occurs in the study groups.
2. Take Managerial Accounting or Financial
Statement Analysis to improve your
understanding of financial statements.
3. When analyzing a case, use the analytical
frameworks provided in your course such as
Porter and SWOT analysis and FIT
framework

3. Boot Camp 3
Entrepreneurship Boot Camp
 Put yourself in the position of the case’s
decision-maker. Try to determine what the
central issues are to the decision to be
made and prioritize what is urgent and what
is important.
 Try to link these central issues to the
financial statements and sort out the
relevant data.

4. Boot Camp 4
Entrepreneurship Boot Camp
 Examine the historical financial
information.
 Compound Annual Growth Rate (CAGR)
 Gross and Net Margins
 Common Form Balance Sheet
 Ratios

Liquidity, Leverage, Coverage, Turnover,
Profitability, and Return

The DuPont equation is a good tool to use.

5. Boot Camp 5
Entrepreneurship Boot Camp
 Look at trends in these ratios
(intracompany) and benchmark them
against the industry or comparable firms
(intercompany).
 Compare the forecasted data to the
historical data and look for inconsistencies
 Look at the cash flow statement. Where are
the sources of funds being generated and
are they sustainable. What are the uses of
funds. Follow the Money.

6. Boot Camp 6
Entrepreneurship Boot Camp
 Is the cash flow of the company capable of
servicing existing debt and to cover
increases in working capital and capital
expenditures to support the projected sales
increase.
 Assets are a function of sales and increase
represent a use of funds
 Capital requirements are a function of asset
requirements and profitability and represent a
source of funds.

7. Boot Camp 7
Entrepreneurship Boot Camp
 Boil the numbers down to their smallest elements
(unit economics) and use common sense. Look at
revenue per employee or sales per sq. ft. Does this
seem reasonable?
 What growth rate would you have to assume to get
to this market value?
 What percent share of market would they have to
have to make the projections?
 Why is the seller selling and is there some window
dressing going on?
 Read the footnotes in the tables and look at the
exhibits that would put a twist on the decision.

8. Boot Camp 8
Return on Assets (ROA)
 Relates profitability to the assets (capital)
employed. Uses some measure of
Profitability divided by Total Assets. It
can be calculated before or after taxes.
Net Profit
ROA = Total Assets

9. Boot Camp 9
Return on Equity (ROE)
 Relates profitability (usually after tax) to
the amount of owner’s capital
employed and is affected by the level of
debt used in the company.
Net Profit
ROE = Owner’s Equity

10. Boot Camp 10
DuPont Formula - ROA
Return on Assets
Profit Margin X Asset
Turnover
NET PROFIT
SALES
SALES X ASSETS

11. Boot Camp 11
RETURN ON EQUITY
Profit Investment Financial
Margin X Turnover X Leverage
NET INCOME X SALES X ASSETS
SALES ASSETS
EQUITY
Dupont Formula - ROE

12. Boot Camp 12
Short Term Cash Cycle
Cash
Raw Materials
Inventory
WIP
Inventory
Finished Goods
Inventory
Accounts
Receivable
Fixed
Assets

13. Boot Camp 13
Short-Term Cash Cycle
Production Cycle
Cash CycleDays in
A/P
Order
Materials
(lag time, order
vs carrying
costs)
Raw
Materials
Inventory
Work-In-
Process
Inventory
Finished
Goods
Inventory
Collection
of A/R
Sale of
Goods or
Services
Material
Receipt
Inventory Costs
Pmt. for Materials
Conversion Costs
Labor, Equip. &
Mfg. Overhead
Inventory Costs
Carrying Costs
Selling &
Credit
Expenses
Pmt. of
A/P

14. Boot Camp 14
Cash Conversion Cycle
Days in Raw Materials Inventory
 Avg. Raw Materials Inventory x 365
Cost of Raw Materials Days
Less: Days in Accounts Payable
 Avg. Accounts Payable x 365
Cost of Goods Sold - Labor Days
Plus: Days in WIP Inventory
 Avg. WIP Inventory x
365
Cost of Goods Sold Days
Plus: Days in Finished Goods Inventory
 Avg. Finished Goods Inventory x 365
Cost of Goods Sold Days
Plus: Days in Accounts Receivable
 Avg. Accounts Receivable x 365
Credit Sales
Days

15. Boot Camp 15
Value Drivers
 Managers can directly affect the firm’s returns and
firm value by:
 Increasing Operating Profits (increasing revenues,
decreasing costs, or employing operating leverage)
 Increasing Asset Turnover - Improved working capital
management and fixed asset utilization
 Judicious use of financial leverage
 Decrease Risk - maintaining liquidity and lowering
variability through planning and diversification

16. Boot Camp 16
Valuation Models
 Book Value
 Appraised Book Value
 Market Value
 Prior Sales of Stock/Transaction Analysis
 Comparable Market Value
 Capitalization Models
 Constant Growth Model
 Discounted Cash Flow Model
 Excess Earnings Model

17. Boot Camp 17
Comparable Market Value
 Surrogate Market Value based on
valuation benchmarks of similar publicly
traded companies.
 Price/Book Value
 Price/Earnings
 Price/Cash Flow
 Price/Revenues
 Price/EBITDA

18. Boot Camp 18
Comparable Market Value
 Comparable Firms should be similar in:
 Industry and Products
 Management
 Size and Geographic area
 Accounting Methods
 Risk and Return
 Usually only publicly traded firm’s information can
be found and do not meet the requirements
above.

19. Boot Camp 19
Capitalization of Earnings
The Present value of $300 into Perpetuity
at a 20% required rate of return is equal
to:
$300
PV = .20 = $1,500

20. Boot Camp 20
Earning’s Adjustments
Normalization of Earnings
 Excessive Compensation
 Tax Strategies
 Excessive lease expense paid to owners
 Personal expenses paid by the business
 Non-Recurring Income or Expenses
 Extraordinary Income or Expenses

21. Boot Camp 21
Capitalization Models
 Constant Growth Model
Projected Earnings Year 1
Equity Cap. Rate - Growth Rate
 All valuation models would add back
surplus cash or undeveloped assets to
the value of the cash flows.

22. Boot Camp 22
Constant Growth Model
 What is the value of an equity stream
projected to be $100 in year 1 and
expected to grow at 10% per year
assuming the investor’s required rate of
return is 20%?
PV = $100 = $1,000
.20 - .10

23. Boot Camp 23
Equity Capitalization Rate
Required Rate of Return (Opportunity Cost)
 Risk Free Rate
 Treasury Bill or Treasury Bond
 + Market Risk Premium
 + Unique Risk of the Company

Variability of Sales and Income, Small Firm Size

Key Man, Lack of Succession, Concentration of
Sales

Market and Financial Risk

24. Boot Camp 24
Equity Capitalization Rate
 Risk Premium is based upon the
analysis and experience of the
appraiser. Assuming a risk free rate of
6%, then the equity cap rate with the
risk premium would range:
 Low risk 15% - 20%
 Medium Risk 20% - 30%
 High Risk 30% - 50%

25. Boot Camp 25
Discounted Cash Flow (DCF)
Firm FCF1 FCF2 FCF3 FCFn

Value = (1+r)
1 +
(1+r)
2 +
(1+r)
3 +....
(1+r)
n
 Where FCF is “free cash flow and “r” is the
required rate of return (weighted average cost of
capital)
 Market value of the debt is then subtracted from
this firm value to arrive at the value of the equity of
the company.

26. Boot Camp 26
Free Cash FlowT
NOPAT (EBIT x (1-T))
+ Depreciation and Amortization
- Increase in Net Working Capital*
- Capital Expenditures
Free Cash FlowT
* Increase in W/C is the spontaneous assets and
liabilities only (A/R, Inv, A/P and Acc. Exp), not
CA-CL.

27. Boot Camp 27
Discounted Cash Flow
 Projected earnings or cash flow
 Usually forecast 5 years into the future.
 Assume a residual value at the end of year 5

Can use the constant growth model or comparable value
YR 1 2 3 4 5 Residual
FCF $100 $200 $300 $400 $500 $5,500
PVIF@20% .833 .694 .579 .482 .402 .402
PV = $83 $139 $174 $193 $201 $2,211
DCF Firm Value = $3,001

28. Boot Camp 28
Residual Value
 Residual Value was calculated as follows:
Year 5 FCF x (1+g) $ 500 x (1+.10)
WACC - g .20 - .10
Residual Value = $5,500

29. Boot Camp 29
Discounts
 Lack of Marketability
 Minority Interest
 Liquidity

30. Boot Camp 30
Lack of Marketability/Liquidity
 Discounts range from 10% to over 50%, but
studies of court cases found the average
discount for lack of marketability is 35%.
Thus, if the surrogate market value or
capitalized value of the company were $1
million, the value after this discount would be
$650,000 at 35% discount.
 Do not use for book value technique.

31. Boot Camp 31
Minority Interest Discount
 A minority block of stock is worth less than
controlling interest since the minority
stockholder can not influence the decisions of
the company.
 Conversely, a majority interest has more
value than a minority interest and a control
premium may be appropriate.
 An additional discount (on top of the
marketability discount) for minority shares
should be applied.

32. Boot Camp 32
Minority Interest Discount
 The discount for minority interest can range
from 10% to 25%.
 The combined discount for lack of
marketability and a minority block of stock
often total 50% to 60%.
 This explains why publicly traded companies
trade at higher multiples than small firms as
they exhibit liquidity.

33. Boot Camp 33
Minority Interest Discount
 When using comparable market value,
the valuation benchmarks of public
companies already assume a minority
block of stock is trading so no discount
is applied to comparable market value
technique, but is applied to the
capitalization of income technique.

34. Boot Camp 34
Venture Capital Method
 Venture Capitalists generally will apply a
comparable or industry price/earnings
multiple (p/e ratio) to projected earning in
year 5 (the exit point) to get a surrogate
market value, then discount that value to
the present at their required return (30-60+
%).
 This present value is the pre-money value
and when added to the capital raised,
produces the post-money valuation.