Valuation 101 csu

Valuation considerations for the next generation

Allen Duck –I am not an attorney or a CPA.

I have dealt with business owners for many years and understand the issues facing the next generation of owners.

Presented to a business class at CSU

Valuation

• A determination of a monetary equivalent to the assets and benefits derived by ownership of a particular business or future business/opportunity.

• Ideally that which is invested [Spent] creates a positive rate of return over the life of the enterprise and above that of risk free alternatives resulting in a greater overall enterprise value.

• A Higher the anticipated risk demands a higher rate of anticipated return.

• Every Business has a value and that is ?? – Whatever the market will bare.– It is dynamic !

Valuation.

$ ????

You bought it for a $1.00 and found friends on a hot dry day. What’s the real value?

Valuation.

$ ????

You bought a case for $12.00 but all your friends already died of thirst?

Used when and where

• Acquisitions and Divestitures• Insurance coverage• Closely held firms with multiple shareholders• ESOP programs• Curiosity of ones own worth• Acquiring bank debt

Time [t]

Reve

nues

/Inc

ome/

valu

e

Startup

Opportunity

Growth

Maturity

Business Lifecycle and Valuation

Acquire Debt

Acquire Debt/Insurance/Sale

Sale/ESOP

Why is this important to younger entrepreneurs?

• Multiple business in your life time.• Knowing how to analyze your own business is

essential. • Knowing what to look for in someone else’s

business if you are joining the firm.• Knowing what you are owed in a partnership if

you or a partner decides to leave and the partnership is dissolved or ownership % modified.

$17T of revenues has to transfer in the coming 15-20 yrs. At Average Multiples

= $6-9 Trillion value

Shift in Economy is forcing a new wave of business owners

US Census Bureau

So what! Who Cares? Big Deal!

>50% of business owners are 55 years or older

Inc. Magazine 2010

100k

1M

10M

40M

100k 1M 10M 30M

Note: the general relation ship of Revenues to Value across multiple industries.

Exiting a Business

• Getting into a business is easy – getting out is where the challenge lies.

• Deciding on what exit strategy is appropriate– Leave, Sell, Pass on to family, pass onto employees

• Determining value !• Determining deal structure – Time value of money.

– I think this is as important as value !

• Finding a buyer.

Timing an Exit and Valuation

Value elements

– Hard or tangible assets• Inventory

– Finished Goods– Sub Assy’s– Raw materials

• Buildings, Equipment and Machinery.

– Soft or intangible assets• IP [trademarks, patents, licenses etc.]• Goodwill !!

– Other• Losses !!

Methods of valuation

• Multiples– Revenue – EBIT– EBITDA

• NPV – Cash-flow• Comparable• All of the above

Know the difference

Value of a stream of Future Cash flows – discounted to present value. If inflation is 5%. $100.00 today is only worth $95.00 in a year

Discount Factors / Risk• Inflation• Cost of equity• Cost of debt• Economic outlook• Market Position v Peers• Financials• IP• Product development• Etc.• Trajectory

Discount/Risk

On Paper Value

Actual Value

NPV - DCF

Multiples – the OUTPUT

Valuation – Fortunes change

Nokia v Apple. Situation reversed over a decade ago illustrating the dynamic nature of value.

“T”

• Most valuations will include a Terminal value or T value.• A business cannot be considered perpetual in regards of its

cash flow and so a tidy way of capturing the “balloon value” is used.

• Assume the business will be sold at the end of the period and will realize a cash benefit of $Y. $Y is added to the cash generated and discounted back.

• Or the NPV is treated by – Value*(1+Growth rate)/(Discount rate – Growth rate)

• The T value can be significant.

Beware the Source of Value

Tell owners the truth.

Where to Exit – in a perfect World

Questionsallen@eighty20advisors.com

970.412.6759