Valuation of Private Companies

In: Business and Management

Submitted By ingvay7
Words 1614
Pages 7
Alternative Approaches to Valuation of Private Companies
1) 2) 3) 4) 5) Comparables Net Present Value Approach Adjusted Presented Value Approach The ‘Venture Capital’ Method Options Analysis

Each approach has advantages and disadvantages. Generally there is no “right” answer to a valuation problem. Valuation is very much an art as much as a science!

Evaluation of Comparables
How to compute comparables:
Start with a sample of securities whose business characteristics are similar to the company being valued. Assume that the company has similar financial ratios to the “comparable” companies. A number of different ratios are typically used: Price/Earnings, Market/Book, Market Value/Sales, EBIT. Then back out the implied value of the company being studied.

Comparables Approach relies on two assumptions:
Comparable companies have future cash flow expectations and risks similar to the firm being valued Performance measure is actually proportional to value


Different ways of Doing Comparables
“Comparable Company” – Uses a multiple calculated from the trading values of firms in the same industry as the firm being valued. “Comparable Transaction” – Uses a multiple from companies that were involved in a similar transaction as the firm being valued. “Comparable Industry Transaction” – Uses a multiple from companies from the same industry that were involved in a similar transaction as the firm being valued.

Problems with Comparables Approach
Generally tough to find appropriate companies to be comparable Which ratio/comparable do you use? There isn’t a “right” answer, so comparables approach will give a range of values rather than one? Many comparable companies have different capital structures.
Leverage will mechanically affect some financial ratios. It is often a good idea to use ratios that are not affected by leverage (for example,…...

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