Valuation of Private Companies by Omnifin Solutions - Author Vikash Goel. The file gives details of valuation of a private company based on various multiples and income approach.

1. Valuation of
Private CompaniesVikash Goel
CA, CFA, MS Finance, MBA, IIM-C,
Registered Valuer (IBBI)
Author of Handbook on Valuation of Securities
and Financial Assets
Omnifin Solutions
www.omnifin.in
www.investmentvaluation.in

2. Vikash Goel | CA, CFA, MS Fin, MBA,Regd Valuer
What’s covered in here
• Valuation of any company
• Specifics to Private companies
• Valuation of private companies

3. Vikash Goel | CA, CFA, MBA, MS Fin, Regd Valuer
Valuation is done throughout the life cycle of an entity:
Early stage:
Angel funding / private placement / fund raising
Mature Stage:
Restructuring(e.g. M&As, CDR)
Compliance – Income Tax; FinancialReporting
IPOs, Bank funding
Brand, Goodwill
Decline stage:
Winding up Insolvency
Business Valuation
purposes

4. Vikash Goel | CA, CFA, MS Fin, MBA,Regd Valuer
Approaches to Valuation
• Market price Method
• Comparable Companies Multiple (CCM) Method
• Comparable Transactions Multiple (CTM) Method
Market Approach
• Discounted Cash Flow Method (DCF)
• Income Capitalisation Approach
Income Approach
• Replacement Cost Method
• Reproduction Cost Method
• (Adjusted) Net Asset Value Approach
Cost Approach

5. Vikash Goel | CA, CFA, MS Fin, MBA,Regd Valuer
No market value for either debt or equity.
Insufficient / inadequate listed comparable companies
Lack of transparency in reported financials
Valuation driven by the presence of key managerialpersonnel
That is, the cash flows represent not only the potential of the business but of the
owners as well.
Valuation of Private Cos – key issues

6. Vikash Goel | CA, CFA, MBA, MS Fin, Regd Valuer
Early stage
companies

7. Vikash Goel | CA, CFA, MS Fin, MBA,Regd Valuer
Early Stage Companies
• Net Asset Value Method
• Comparable Companies Multiple Method
• Comparable Transactions Method
• Venture Capital Method
• Discounted Cash Flow Method

8. Vikash Goel | CA, CFA, MS Fin, MBA,Regd Valuer
Example - CCM
• Consider the valuation of a matured privately held company A Ltd from Steel Industry.
The company has reported Sales of
• The following companies have been identified as comparable companies based on risk
and size of A Ltd.
• Usha Martin, Sunflag Iron & Steel Company Ltd, Adhunik Industries Ltd, Kalyani Steel
Ltd, JSW Steel Ltd
• Value the range of values of A Ltd based on comparable companies multiple method
(P/E and P/Sales Multiples).
A Ltd (Amount in Rs Lakhs)
Sales 122,927.05
Profit after Tax 13,022.04
Number of Shares (Lakhs) 2,823.61

9. Vikash Goel | CA, CFA, MS Fin, MBA,Regd Valuer
Comparable Companies Multiple Method
A Steel Company
(Rs Lakhs) Revenue EPS No. of shares
Average
Price P/E Ratio
P/Sales
Ratio
Usha Martin 173,768.00 13.08 304,741,780 30.64 2.34 0.54
Sunflag Iron & Steel Company Ltd 224,061.00 6.35 180,219,448 30.70 4.83 0.25
Adhunik Industries Ltd 67,104.03 0.81 46,763,750 96.09 118.63 0.67
Kalyani Steel Ltd 141,978.40 30.25 43,759,380 213.80 7.07 0.66
JSW Steel Ltd 7,724,600.00 34.35 2,401,711,464 247.39 7.20 0.77
Average 28.01 0.49
Median 7.07 0.66
PATT SalesT
Reported Values (A Ltd) 13,022.04 122,927.05
Value of the Company
(based on Median Value multiples) 92,036.79 81,131.85
Number of Shares (Lakhs) 2,823.61 2,823.61
Value Per Share (INR) 32.60 28.73

10. Vikash Goel | CA, CFA, MS Fin, MBA,Regd Valuer
Comparable Companies Multiple Method
Valuation of Flipkart may be done on the basis of its listed comparable
Amazon:
Inputs:
• Amazon’s Market Capitalisation
• Number of users on Amazon
• Number of users on Flipkart
Amazon’s Value per user = Amazon’s Market Cap / No. of users on Amazon
Flipkart Value = Number of users on Flipkart x Value per user
Possible adjustments include:
• Less: Discount for lack of Marketability [DLOM]
• Less: Amazon’s global diversity
• Less: Product diversification
• Adjustment for Currency differences
• Adjustment for Country specific factors [US Growth vs India growth]

11. Vikash Goel | CA, CFA, MS Fin, MBA,Regd Valuer
Comparable Transactions Method
Value as per Comparable Transactions Method AMOUNT
Enterprise Value of WhatsApp (USD) as part of acquisition 19,000,000,000
Daily Active Users of WhatsApp 450,000,000
Value per Daily Active User (USD) 42.22
Assumed Exchange Rate 70.00
Value per Daily Active User (INR) 2,955.56
Less: Scalability Discount (80%) 2,364.44
Adjusted value per Daily Active User (A) 591.11
Daily Active Users of CHATAPP (B) 16,00,000
Value of CHATAPP (A) x (B) 945,777,778
Value of CHATAPP (Rounded) INR 94.58 Cr
Year 2014, Valuation of a Text Messaging App ChatApp with 1.6 million users. The
company does not report any revenues.

12. Vikash Goel | CA, CFA, MS Fin, MBA,Regd Valuer
Venture Capital Method
• Forecast the profit for a future year
• Multiply the future year forecast with a P/E of a listed company
• This is called Exit Value or Terminal Value – the value at which the
VC will exit.
• Exit value is discounted using a Target Rate of Return – usually
higher than Ke
• Target rate of return factors in Risk of failure, historical experience, etc.

13. Vikash Goel | CA, CFA, MS Fin, MBA,Regd Valuer
Venture Capital Method - Example
A young consulting company Om Ltd is expected to go public in 5
years from now.
The VC expects that the net profits of the company 5 years from now
will be INR 45 crores.
Average PE ratio of publicly traded consulting companies is 20.
Om Ltd is evaluating fund raising from investors who are expecting
35 percent from the investment until the company goes public.

14. Vikash Goel | CA, CFA, MS Fin, MBA,Regd Valuer
Venture Capital Method - Solution
Target profit 5 year from now 45 Crore
Target P/E Multiple 20
Exit Value 45 x 20 900 crore
Value of the company as per VC Method
= 900 / (1.35)^5
= 200 Crore

15. Vikash Goel | CA, CFA, MS Fin, MBA,Regd Valuer
DCF Method – Key issues
• Historical data
• KMP Valuation
• Reliability of information
• WACC Estimations – especially Beta
• Sustainability issues

16. Vikash Goel | CA, CFA, MS Fin, MBA,Regd Valuer
DCF Method- Overcoming key issues
Use latest numbers and get as close to information as possible
Have a through due diligence in place
Fictitious Revenues
Extraordinary forecasts
Personal expenses charged to P/L
Choose long term growth rates carefully
Consider a Three Stage Model
Remember scaling is increasingly difficult
Competitive advantage – how sustainable is it

17. Vikash Goel | CA, CFA, MS Fin, MBA,Regd Valuer
Cash Flows
The cash flow can be pre-tax or post-tax
Nominal cash flows that include expectations regarding inflation
In the same currency in which the forecast is prepared
Accounting Profit
Add: Non Cash Expenses (e.g. Depreciation and Amortisation)
Less: Outflow towards Capital Expenditure (Change in Gross Fixed Assets)
Less: Outflow towards Working Capital (Change in Non Cash Working Capital)
Equals Cash Flows

18. Vikash Goel | CA, CFA, MS Fin, MBA,Regd Valuer
Determining Free Cash Flows
• Free Cash Flows represent the after tax cash generated by the business, available for
all the investors (stockholders and banks), excluding any impact of the financial
structure.
Profit After Tax
Add: Non Cash Charges (E.g. Depreciation)
Less: Capital Expenditure
Less: Changes in Working Capital(Excl Cash)
Add: Interest (post of tax)
Free Cash flows to the Firm (FCFF)
Discounted at WACC
Value of the Firm (Company)
Less: Debt (Current Value)
Value of Equity
NB: We prefer FCFF approach when FCFE is negative or when capital structure is unstable
Profit After Tax
Add: Non Cash Charges (E.g. Depreciation)
Less: Capital Expenditure
Less: Changes in Working Capital (Excl Cash)
Add: Net Borrowings (Long Term)
Free Cash flows to Equity (FCFE)
Discounted at Cost of Equity
Value of Equity
FCFE FCFF

19. Vikash Goel | CA, CFA, MS Fin, MBA,Regd Valuer
Discount Rate
Consider:
• The type of asset being valued
• The rates implicit in comparable transactions in the market
• The geographic location of the asset and/or the location of the
markets in which it would trade,
• The life/term and/or maturity of the asset and the consistency of
inputs.
• The bases of value being applied,
• The currency denomination of the projected cash flows.

20. Vikash Goel | CA, CFA, MS Fin, MBA,Regd Valuer
Cost of Capital (WACC or Kc)
Cost of Capital (Kc) represents the cost of funds used for financing the business. It is the
rate of return that the suppliers of capital—bondholders and owners—require as
compensation for their contributions of capital.
• If business is financed solely through Equity, Kc is the same as Cost of Equity (Ke)
• If business is financed solely through Debt, Kc is the same as Cost of Debt (Kd)
• Usually companies use a mix of Debt and Equity while financing their business, thus
the overall cost of capital is derived from a weighted average of cost of all capital
sources, known as the Weighted Average Cost of Capital (WACC)
Cost of capital represents a minimum benchmark rate that a company must overcome
before it can generate value for its financers.

21. Vikash Goel | CA, CFA, MS Fin, MBA,Regd Valuer
Cost of Capital
Cost of Debt
Cost of Debt (Kd)
The Cost of Debt is the interest rate paid by the company on such debt. However, since
interest expense is tax-deductible, we use the After-Tax Cost of Debt for Capital budgeting
purposes. the after-tax cost of debt is calculated as:
Pre Tax Cost of Debt x (1 – Tax rate)
Example:
If the rate at which the company can borrow funds from the financial institutions is 11% and
the tax rate applicable to the company is 30%. The Post Tax Cost of Debt would be
11% x (1 – 30%) = 7.7%
RATE OF DEBT AT WHICH THE COMPANY CAN BORROW TODAY, NOT THE HISTORICAL RATE.

22. Vikash Goel | CA, CFA, MS Fin, MBA,Regd Valuer
Cost of Capital
Cost of Equity
Although the rate of return demanded by equity investors is not as clearly defined as it is by lenders, equity
investors do expect a return on their investment. Cost of equity is approximated by the Capital Asset
Pricing Model (CAPM).
Cost of Equity = Risk Free Rate + Beta x Market Risk Premium
Risk Free Rate: a return on an investment that has least likelihood of default e.g. 10 Year Government
Bond Yield
Company’s Beta: Sensitivity of stock return with respect to the market return e.g. if beta is 1.8 and the
market is expected to move up by 10%, then the stock should move up by 18% (1.8 x 10) [Cov / Var]
Market Risk Premium: Risk premium is what a particular market (E.g. BSE Sensex) earned over the
rate that a risk free asset (e.g. Govt bond) earned. i.e. [Market Return – Risk Free Rate of Return]
Example: If the 10 Year Government bond yield is 7.5% and the BSE Sensex return over the last one year is
15%. Assuming the company’s Beta is 1.2, what is the Required return on Equity?
Ke = 7.5% + (15% - 7.5%) x 1.2
= 16.5%

23. Vikash Goel | CA, CFA, MS Fin, MBA,Regd Valuer
Cost of Capital
Beta of a private company
Beta of a private company Om Ltd can be assessed based on the following information.
Average Beta of comparable listed companies = 1.1
Average D/E Ratio of comparable listed companies = 0.34
Tax Rate = 30%
Target D/E Ratio of Om Ltd = 0.5
Unlevered Beta = Levered Beta / (1 + (1 – Tax Rate) x D/E ratio)
= 1.1 / (1+(1-0.3) x 0.34)
= 0.89
Levered Beta = Unlevered beta x (1 + (1 – tax rate) x Target D/E Ratio)
= 0.89 x (1+(1-.3) x 0.5)
= 1.20

24. Vikash Goel | CA, CFA, MS Fin, MBA,Regd Valuer
Cost of Capital
Weighted Average Cost of Capital
Example:
Suppose DM Ltd has a capital structure composed of the following:
Debt 30 million
Equity 45 million
If the before-tax cost of debt is 11% (Pre tax Kd), the required rate of return on equity is 16.5% (Ke), and the
marginal tax rate is 30%, what is DM Ltd’s weighted average cost of capital?
Solution:
Weight of debt (Wd) = 30  (30 + 45) = 0.40
Weight of common equity (We) = 45  (30 + 45) = 0.60
WACC = [Wd x Post Tax Kd] + [We x Ke]
WACC = [(0.40) x (0.11)(1 – 0.30)] + [(0.60)(0.165)]
= 0.0308 + 0.0990
= 0.1298 or 12.98% ~ 13%

25. Vikash Goel | CA, CFA, MS Fin, MBA,Regd Valuer
Cost of Capital
Weighted Average Cost of Capital
Om Pvt Ltd
Growth rate for next 5 years 18.00%
Terminal Growth Rate 8.00%
Cost of Equity 16.50%
AdditionalRisk premium 4.50%
WACC / Discount Rate 21.00%
FCFF 0 1 2 3 4 5 5
2019 A 2020E 2021E 2022E 2023E 2024E 2024E
Revenue 353,066.94
PAT 32,280.48
Add:Depreciation and Non Cash Exp 14,922.11
Less: Capital Expenditure 15,810.47
Less: Changes in NON CASHWorking Capital (12,723.52)
Add:Interest (1 - tax rate) -
FCFF 44,115.64 52,056.46 61,426.62 72,483.41 85,530.42 100,925.90
Terminal Cash Flows 838,461.30
PV of Cash Flows 43,021.86 41,955.21 40,914.99 39,900.57 38,911.30 323,263.13
Value of the Firm (Lakhs) 527,967.07
Less: Value of Debt -
Add:Cash 48,905.63
Value of Equity(Operating ) 576,872.70
Less: Discount for KMP (100,000.00)The director willresign after takeover; valueattributed to such director
Add:Investment Property 50,000.00A land has been lyingunused, its fair value is assumed to be 50,000 lakhs
Value of Equity(FULL) 526,872.70
No. of Shares 1,319.69
Value per Share 437.13

26. Vikash Goel | CA, CFA, MS Fin, MBA,Regd Valuer
How to calculate Terminal Value
Common methods
• Gordon growth model/constant growth model - appropriate only for
indefinite-livedassets
• Market Approach/Exit Value - appropriate for both deteriorating/finite-lived
assets and indefinite-lived assets, and
• Salvage Value/Disposal Cost - appropriate only for deteriorating/ finite-lived
assets.
• No growth CompanyTerminal Value = Cash flow for next Year / Discountrate
• Stable Growth Company Terminal Value = Cash flow for next Year / (Discount
rate – Growth Rate)

27. Vikash Goel | CA, CFA, MS Fin, MBA,Regd Valuer
Net Asset Value or Book Value method
• Not specified in the standards
• Valued at Total Assets Less Total Liabilities
• Recommend to adjust the changes in fair value of key assets like:
• Investments – Balance sheet of the invested companies
• Tangible Assets – Land
• Tangible Assets – Building
• Tangible Assets – Plant & Machinery
• Items that are not in Balance Sheet.

28. Vikash Goel
vikashgoel@hotmail.com
Access resources on
www.investmentvaluation.in
THANK YOU