1	Private Company Valuation David Lamb Prospect Research Consultant Blackbaud Analytics
2	Agenda Business 101 Valuation concepts Tools for valuation Making it practical for fundraising
3	Business 101
4	Closely held stock When a company incorporates, it issues shares, known as “outstanding stock” The value of the company is divided evenly among the shares “Publicly held” stock vs. “closely held” Finding the value of public company stock is easy Finding the value of private company stock is difficult and expensive
5	Why value a company? The value of a company is influenced by the reason you’re asking the question Reasons to value a private company: To sell it To raise capital from investors Part of a divorce settlement For a management buyout For estate planning For an employee stock ownership plan For taxation Change the purpose of the valuation and you change the stock price Only fundraisers ask how it affects a gift
6	What is it worth? What is a company worth? It’s worth the tangible assets It’s worth the assets + goodwill It’s worth whatever someone will pay for it Situations that increase the value: A great product or service that people want to buy Customers who can afford to buy it Situations that decrease the value: An obscure product or service with limited appeal Price is too high or customers are too poor
7	Valuation Concepts
8	Valuation in the real world Information typically is not available on private companies The value of a company is not necessarily identical to the bottom line on the balance sheet Companies with a negative cash flow can have a high value Companies with a positive cash flow might have a modest value
9	Valuation in the real world To find out what a company is worth, sell it Value is partly (sometimes mostly) subjective Sometimes D&B provides a net worth figure Read everything you can about your target company – it’s not just numbers
10	Various ways to measure value Book value Price/earnings ratio (P/E) Discounted cash flow Comparison to similar companies
11	Comparable companies Find a similar public company Downside: a public company is almost always valued higher than an otherwise equivalent private company would be Find a similar private company that sold recently Downside: the only commonly available metric is sales, and value is not always clearly tied to sales or even profit Comparison is only method that is possible if you have no access to the financial statements and appraisals of the assets is comparable companies
12	Valuation Tools
13	Comparison to public companies Yahoo Stock Screener (http://screen.yahoo.com/stocks.html) Parameters that can be used Industry (SIC or NAICS) Sales Enter relevant info for the target company Look for Market Cap. Your target company value is probably considerably less
14	Comparison considerations Your prospect’s industry and company sales rarely match those offered by Yahoo perfectly Public companies tend to be much larger than their private counterparts Read the profile to see if the comparison company is similar in purpose to the target If the public company has flat or negative earnings, it may still have value Same may be true of the private company
15	Comparison to other private cos Business Valuation Resources (www.bvmarketdata.com) Pratt’s Stats Database of over 9,500 private company sales from 1990 to present Deal price ranges from $1 million to $14.4 billion Updated monthly with about 100 transactions added / month $595 Bizcomps Database of over 9,500 private company sales from 1993 to present 61% of the companies have gross revenues less than $500K 18% of the companies have gross revenues over $1 million $395 INC. Magazine’s Ultimate Valuation Guide
16	INC.’s 2006 Valuation Guide
17	INC.’s 2006 Valuation Guide
18	BizStats.com Select the industry Enter the sales Many elements of the cash flow statement are shown including an estimate of retained earnings
19	BizStats.com rules of thumb
20	Business classifieds BizBuySell GlobalBX Search for business by line of business and state
21	Making it practical
22	Case Situation Privately owned grocery chain (2 stores) in Nebraska Founded in 1955 405 employees D&B reports sales of $45.8 million 200,000 square feet No trend information is available Major competition is a Super WalMart, recently arrived Prospect is the son of the deceased founder
23	Using valuation guides INC. Guide Median sales for grocery stores: $773M Median sale price: $200M Valuation multipliers: Best: 4.47 Second and third best: 0.27 BizStats Guideline 11-18% of annual sales + inventory
24	Using valuation guides Estimates using INC: Sales of the target are well below the median, encouraging us to consider a lower estimated value Using the second best multiplier: 0.27 $46 million = $12.42 million Estimate using BizStats rules of thumb 11% of sales ≈ $5 million + inventory 18% of sales ≈ $8.2 million + inventory
25	Business classifieds BizBuySell (search on 9/12/06) No grocery stores found in Nebraska Widened the search to include surrounding states Results:
26	BizBuySell 1
27	BizBuySell 2
28	BizBuySell 3
29	Estimated Company Value - Summary Target company sales: $46 million Based on classifieds found, the target company is larger than most in the region Known, but smaller stores are asking the low 6-figures BV Resources (aka INC valuation guide) value: Median revenue = $773 million Low sales price = $14 million Median sales price = $200 million High sales price = $1.6 billion BV Resources multiplier 4.47$46 million =$205.6 million 0.27$46 million = $12.4 million D&B reported net worth: $6.9 million Biz Stats rule of thumb for grocery stores = $5 million to 8.2 million + inventory
30	Estimated Value The target company is worth $300,000-600,000 $2,000,000-10,000,000 $10,000,000-20,000,000 Over $50,000,000 None of the above I haven’t got a clue
31	Making sense of it all The problem of company valuation is the same as for personal net worth: you can’t get the necessary information The good news: you don’t need to pin down the precise value You’d like to know: If it’s $1M vs $100M If it’s a going concern If the industry is above or below the diagonal on the INC chart.
32	Making sense of it all
33	If the prospect owns 50% Assume a company value of between $2 million and $10 million The prospect’s share in the target company could be between $5M (50% of $10 M) and $1M (50% of $2 M) Let’s split the difference at $3 million Reduce the proportions of net worth (from the IRS chart) for property and stock because of the semi-rural area This makes closely held stock a higher percentage of the prospect’s net worth – say 25%
34	If the prospect owns 50% Net worth could be about $12 million (private company ownership of $3 million x 4) 2%-5% might be philanthropic capacity Capacity ≈ $240,000-$600,000
35	Consolidated resource list Yahoo! Stock Screener: screen.yahoo.com/stocks.html BV Resources: www.bvmarketdata.com Inc. Valuation Guide: www.inc.com/valuation/index.html BizStats: www.bizstats.com BizBuySell: bizbuysell.com GlobalBX: www.globalbx.com www.lambresearch.com White Paper www.blackbaud.com/resources/white-papers.aspx