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This PPT was originally presented as part of a business class at CSU and touches on the high level of value, its importance, and its application in the environment many younger entrepreneur's find themselves. Value is more than a multiple on revenues or income, it is dynamic, can be defended and improved when the underlying drivers are understood.
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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
