docHow to Value a Business The secret to knowing what a marshall
download 
Report Transcription
How to Value a Business The secret to knowing what a marshall
marshallkeen www.marshallkeen.com How to Value a Business The secret to knowing what a business is worth marshallkeen www.marshallkeen.com Important – Read This First • You have downloaded this content and it is your right to use it for your own purposes purposes. You do not have the right to copy any part of this material and present it as your own. • Notice • The documents and files contained in the this p presentation, the download materials and worksheets and the information p provided on the http://www.marshallkeen.com and http://www.buyabusinessforapound.com websites and any related sites do not constitute financial advice under the Financial Services and Markets Act 2000. If you require such advice, you should seek appropriate professional guidance. • Copyright © 2008 by Marshall Keen Ltd. All rights reserved. No copies of this content may be made, including photocopy, scan, computer, electronic, manually, or by any methods, without express written permission of Marshall Keen Ltd. No reference has been intended to any person, alive or dead. This eBook is licensed to the original purchaser only. Duplication or distribution via ee-mail, mail, floppy disk, network, printout, or other means to a person other than the original purchaser is a violation of International copyright law and subjects the violator to fines and/or imprisonment. • Limits of Liability/Disclaimer of Warranty: • The author and publisher of this material and any accompanying materials have used their best efforts in preparing this program. The author and publisher bli h make k no representation i or warranties i with i h respect to the h accuracy, applicability, li bili fi fitness or completeness l off the h contents off this hi program. They Th disclaim any warranties (expressed or implied), merchantability, or fitness for any particular purpose. The author and publisher shall in no event be held liable for any loss or other damages, including but not limited to special, incidental, consequential, or other damages. • Any actions or decisions taken based on these materials are the sole responsibility of the individual. Marshall Keen Ltd, and its directors and employees, accept no liability in relation to such actions or the consequences of such actions. • This manual contains materials protected under the International Copyright Laws and Treaties. Any unauthorised reprint or use of this material is prohibited. You have agreed to these conditions through the download of this book and related materials. • • Published by: Marshall Keen Ltd [email protected] d i @b b i f d marshallkeen www.marshallkeen.com The secret to knowing what a business is worth • • • • Many people M l will ill assure you that th t th there are specific, ifi scientific i tifi ways tto value l ab business i and most people believe that this dark art is only known to the select few who are paid vast sums of money for their services. If you speak to accountants, accountants business brokers brokers, investors or venture capitalists they can give you chapter and verse on how to apply some of the theories. They can tell you about Enterprise Values, Discounted Cash Flows, Price/Earnings multiples, and multipliers of Revenue, EBITDA, EBIT and PBT. The explanations will be filled with jargon and after listening for 5 or 10 minutes you’ll be sitting there in a trance of confusion. Even senior corporate lawyers and experienced business people have it set in their minds that those who advise on and buy businesses know exactly what they’re they re talking about and can use their skills to determine an exact valuation for what your business is worth. In reality, there’s there s only one real measure of what a business is worth. There’s There s only one key that determines how much you will get for your business or anything else that you want to sell. It’s the secret that gets continually overlooked and is the cause of much stress and debate around the business world. marshallkeen www.marshallkeen.com What’s What s the secret? • • • The only Th l reall measure off what h tab business i iis worth th is i how h much h someone else l iis willing to pay for it. It’s that simple. The value of a business is wholly determined by the amount of money someone else would be willing to give acquire it. Now although this is a simple, Now, simple and much overlooked secret secret, it doesn’t doesn t come without its challenges. The first major challenge is that the potential buyer often won’t reveal what they’re reallyy willing g to p pay. y This is all p part of the negotiation g g game,, and its happening pp g everywhere from the haggling in a Moroccan souk to employees trying to negotiate a salary increase. The object of the game is to find out the real limits of the other person without causing offence or upset. marshallkeen www.marshallkeen.com The Combined Value • • • When someone is Wh i buying b i a business, b i then th they th may be b able bl tto gett all ll sorts t off additional value from it by combining it with their existing business. And this may make it far more valuable to them that it would be to another buyer. If a business has a product or service that they know they can introduce and sell to their existing customers then it would be worth more to them than to a buyer who serves a different market. A smart buyer will insist that they’re not going to pay you for the extra value that they’ll be bringing to the deal and that sounds like a logical justification. However, in reality the smart buyer will be willing to buy at any price that still provides an overall healthy profit for them. The second major challenge is that the buyer will have to justify to their investors why they are willing to pay a certain amount, and that’s much easier when it concurs with the formulae and calculations mentioned earlier. marshallkeen www.marshallkeen.com So how does this help you? • • • • You need Y d to t understand d t d what h t th the fi financial i l criteria it i are so th thatt you can k know whether h th the value you want to pay for a business falls within an expected range. Applying all the main criteria will give you a low end and high end valuation, with other values falling between the two extreme. If the value you’re you re considering falls outside of the range of valuations (i.e. higher) then you will need a good justification for shareholders, investors or lenders as to why you would be willing to pay a higher price. Of course, if it’s your money you only have to justify this to yourself. It may be down to valuable intellectual property, a strong management team, a loyal customer base, valuable contracts or elements that protect the business by making it hard for competitors to enter the market. All of these factors can help to increase the value of your business. business Equally, a Seller will have to have valid justifications if they want to price their business at a level outside of standard valuation ranges using the normal calculations. Ultimately, the other key factor in valuing a business is what you want and what you are willing to pay. And finding that out is the objective of the game for the Seller, so you may not want to give it away too quickly. marshallkeen www.marshallkeen.com Key valuation factors • These are the elements that will be used to determine a valuation range for a company. • • • • • • • • • • • • • • Cash & Cashflow Future Cashflows Debt vs. Equity Discounted Future Cashflows (NPV) Terminal Value/Continuing Value Forecasting Accuracy Cost of Capital (CAPM/WACC) Return on Investment Internal Rate of Return (IRR) Revenue/Turnover Multiples Profit Multiples Balance Sheet Value Goodwill marshallkeen www.marshallkeen.com Cash & Cashflow • Cash is the lifeblood of the business • Businesses that can generate cash are highly valued • The Th ultimate li goall iis positive i i cashflow hfl • Buyers uye s look oo at current cu e t cash cas & cas cashflow o and future cashflow • Over O ti time N Nett P Profit fit and dC Cashflow hfl converge to the same figure marshallkeen www.marshallkeen.com Future Cashflow • A buyer can see current the cash position and the historic cashflow • Valuations will be determined by the future cashflow • Key elements • sustainable i bl • growing • recurring • secure • What is the demand on the cashflow • Equity q y – return to shareholders • Debt – return to debt providers • Ratio will stay constant • What has to ultimately be given back? marshallkeen www.marshallkeen.com Discounted Cash Flow (DCF) • Takes the future cashflow projection y moneyy • States it in terms of today’s • Assumes that cash in the future is worth less than cash today • Applies discount rate to each period’s cash • Formula F l = • C1/(1+r)+C2/(1+r)2 +C2/(1+r)2+ … +Cn/(1+r)n • C = cashflow in period r = discount rate marshallkeen www.marshallkeen.com Financial Measurement • Cost of Capital – risk/return (WACC) • Investors want a greater return for a greater risk • Shares Sh ((equity) i ) can provide id higher hi h return than h bank b k savings i but with more risk • Expressed p as a p percentage g – the amount yyou want to earn on your investment • Time value of Money • Concept that £100 today is worth more than £100 in 1, 2 or 3 years • Based on what hat that money mone could co ld be doing in the period before you get it or spend it • Interest rates used are known as the discount factors Discount Table The Time Value of Money How much is £100 worth in the future? Interest Rate\Year Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 5% Rate £95 £91 £86 £82 £78 £75 £71 £68 £64 £61 10% R t 10% Rate £91 £83 £75 £68 £62 £56 £51 £47 £42 £39 15% Rate £87 £76 £66 £57 £50 £43 £38 £33 £28 £25 20% Rate £83 £69 £58 £48 £40 £33 £28 £23 £19 £16 25% Rate £80 £64 £51 £41 £33 £26 £21 £17 £13 £11 marshallkeen www.marshallkeen.com Terminal Value • • • • • • Also known as Continuing Value Discounted cashflow will not run indefinitelyy Usually to end of business plan projections Beyond this a continuing value is used Net profit is used as approximation to cashflow A value l is d determined d as ffollows: ll Terminal Value= PAT/(WACC – g) • PAT = Net profit after tax in final year of DCF • WACC = Weighted Average Cost of Capital • g = expected growth in free cashflow • This value has to be discounted to current values marshallkeen www.marshallkeen.com WACC • • • • Weighted W i h d Average A Cost C off C Capital i l Also known as the discount rate Based on the risk profile of the company Formula = • • • • Rf + β(Rm – Rf) Rf = The risk free return rate Rm = The market return rate β = beta factor (covariance of share risk against the market) • Varies by industry, sector and company • It’s an approximation marshallkeen www.marshallkeen.com Shareholder Value • Shareholders are looking for current return and long term growth (either or both) • Capital investment indicates ability to maintain earnings and growth • Price of shares indicates market expectations of compan (P/E ratio) company marshallkeen www.marshallkeen.com Other Valuation Measures • • • • • • Return on Investment (ROI) Return on Capital Employed (ROCE) Internal Rate of Return (IRR) Return on Equity (ROE) Payback Enterprise Value marshallkeen www.marshallkeen.com Financial Measurement • Net present value (NPV) • The discounted value of future cashflow in today’s terms • Addition of each years cashflow, discounted at the appropriate rate • Internal I t l Rate R t off R Return t • • • • A crude measure of the return on the investment A investment An i t t ttooll used d ffor assessmentt The discount rate at which the NPV is equal to zero Unreliable for unusual cashflows marshallkeen www.marshallkeen.com Financial Measurement • Payback • The period it takes to recoup the money invested • Number of years it takes to have a zero cashflow (money in = money out) • Discounted Di t d payback b k • The number of years it takes to have a zero discounted cashflow • Discounted money in = discounted money out • Reflects the fact the expenditure p is usuallyy up-front p and income lags marshallkeen www.marshallkeen.com Revenue Multipliers • Revenue/Turnover • Turnover = headline sales figures • Revenue = what is actually earned from direct sale • Multiples usually fall between 1 & 3 • Varies by industry, sector, business and expectation i • Usually a “rule rule of thumb thumb” check marshallkeen www.marshallkeen.com Profit Multipliers • Can C b be b based d on:• • • • • PBIT – Profit Before Interest & Tax PAT – Profit After Tax EBIT – Earnings Before Interest & Tax EBITDA – Earnings Before Interest, Tax, Depreciation and Amortisation F Free Cash C h Fl Flow • Can use Sector PE ratios for comparison • (1 (1-g/r)/(k-g) g/r)/(k g) – g = long term growth rate in earnings and cashflow – r = rate of return on new investment – k = discount rate • Rule of thumb check = e.g. 6 x EBIT • Varies by industry, sector, business and expectation marshallkeen www.marshallkeen.com Balance Sheet • • • • • Sanity check on valuation Does the business have valuable assets? Are there significant debts? What are the working capital requirements? Are there significant intangible assets (goodwill etc.) t ) • What is the current cash position? • Goodwill = the value over and above the net assets that is paid for the company marshallkeen www.marshallkeen.com Value • Definitions • Present value of the company’s free cash flow + present value of after-tax non-operating cashflow • Present value of cashflow during explicit forecast period + present value of cashflow after explicit period • Both B th can b be plus l b balance l sheet h t ((nett assets) t ) • Both can be plus further intangible elements marshallkeen www.marshallkeen.com Considerations for IPO/Sale • • • • • • • • • • • • • • • Efficiency Ratios (sales per employee) Leverage ratios (debt to equity) Interest coverage – the amount of earnings available to pay interest expense Profit Margins (gross & net vs Industry) Use of proceeds Earnings ratio (% to net assets,% to sales) Operating history Operating base (regional, national, international) Quantity, quality & experience of management Product differentiation & innovation Single or multiple products/services Intellectual Property Rights & Patent rights Emotion Competition Whatever the market is willing to pay!!! marshallkeen www.marshallkeen.com Valuation Approaches • • • • Intrinsic Value = NPV of divi’s/cashflows Relative Value = compare to similar co co’ys ys Market Anticipation = look at market/ind. Technical Analysis = based on share prices marshallkeen www.marshallkeen.com Value Drivers • Businesses have 2 types • Value creators = positive to cash • Value destroyers = negative to cash • Guess which ones we want! marshallkeen www.marshallkeen.com Shareholder Value • Profit • Basic measure of company’s performance – can be manipulated • Cash • More M iindicative di ti measure – certainly t i l shows h poor performance f • Value • A Assets t off th the company – indication i di ti off iinvestment, t t b butt could ld be cash poor • Investment • Shows potential for future earning marshallkeen www.marshallkeen.com Shareholder Value • Return • Amount shareholders require for investing in shares • Risk • Probability that venture may fail – higher risk requires higher return • Gearing (debt/equity ratios) • Debt b is cheaper h b but h has ffixed d payment profile; f l equity investors expect more in the long run for the risk they are taking • Short term vs. vs Long term • Different types of investors • Strategic – not an excuse for speculative investment • Need to combine current position and future benefits marshallkeen www.marshallkeen.com Cost Benefit Analysis (1) • C Comparison i off the h measurable bl b benefits fi against i the h investment • Cashflow • Measure of the cash spent against the cash recouped • Uses the time value of money • Impact on Business • Consideration of secondary impacts – migration/substitution • Technological developments/changes marshallkeen www.marshallkeen.com Cost Benefit Analysis (2) • Tangible benefits • Actual measurable savings or income streams • Intangible (valuing) • Corporate PR, Market share, partnerships, research • Alternative use • Consideration of what assets could be used for, if a venture d does nott work k • Consideration of the alternative use, and hence value, of items consumed ((People, p , assets,, money) y)
