Valuation Methods – Applying the multiple

 Valuation  No Responses »
Mar 172012
 

Applying the multiple to your target

Steps

  1. Calculated the average or mean of the multiples – see Precedent Transaction Comps or Public Trading Comps
  2. Apply discount or premium to your multiple – see Precedent Transaction Comps or Public Trading Comps
  3. Apply premium to your target

Assuming the mean revenue multiple is 1x, and the target had $20m in revenue, then the value of the target is $20m.
Assuming the mean EBITDA multiple is 7x, and the target had $5m in EBITDA, the value would be $35m.
So based on these two multiples, the value of the company would range from $20m to $35m.

Timing

Be sure to the timing of your multiples and your targets numbers are correct. For example, using forward looking multiples and LTM revenue will give you misleading numbers.

Variation within the range

There would be more variation as you consider where the target’s multiples should fall within the range of the compset. If it has a higher EBITDA margin than it’s peers, then it deserves a higher EBITDA multiple.

Again this is where the art of valuation comes in to play.

 Posted by at 4:16 PM  Tagged with: , , , , ,

Valuation Methods – Precedent Transaction Comparables

 Valuation  No Responses »
Mar 172012
 

In addition to the public trading multiples comparables, the other common multiples valuation methodology is the M&A multiples compset. M&A multiples uses mergers and acquisition transactions to value the target. One can use the value that others that have put on a company to help determine the valuation of the target.

The example below, taken from the Oracle/Autonomy deck shows recent precedent transactions in the enterprise software space.

M&A comp set

The list would be shorter and more varied than the trading multiples compset.

Premium

With most acquisitions, there is a premium paid for the target. There is value to controlling the company rather than just investing in the target. There is potential for operational synergies (top-line growth, decreased overhead, decreased financial risk, funding cost etc.)
That premium is included in the price of the acquisition and hence baked into the M&A multiple, so you would need to discount the M&A multiple to get to a fair trading multiple. I’ve seen discounts ranging from 15% to 50%.

After coming up with the the multiples, you apply them to your target.

 Posted by at 4:05 PM  Tagged with: , , ,

Valuation Methods – Public Comparables

 Modeling, Valuation  No Responses »
Mar 062012
 

There are numerous ways to value a company. Each method has its pros and cons and are usually used in combination to triangulate a value. Of course, the value is ultimately set by the buyer.

This post will give an example of public comparables methodology. A public compset is a select set of publicly traded companies where price metrics and operating metrics are laid out in a table for comparison with the target company. The example below is a quick compset I threw together of internet companies with Apple and RIMM thrown in for comparison.

What companies to include

Ideally, there are direct competitors and pure plays, meaning they only focus on that one product/service. You can also include companies that offer similar services. In our example compset below, most are internet/tech companies. But there is a sub-segment of pure internet companies if you remove Apple and RIMM.
You can also segment the list based on size or other outliers.
In my experience, the ideal list size is 7-10 companies.
Continue reading »

 Posted by at 3:18 PM  Tagged with: , , ,

Capital Expenditures and Depreciation

 Balance Sheet, Cash Flow Statement, Financial Statements, Income Statement, Modeling  No Responses »
Jan 102012
 

Capital Expenditures aka CapEx is the spending of money to buy or fix assets. CapEx is typically related to buildings, property, equipment. Many financial models are built to help determine growth and expansion plans that require spending money on equipment and other assets. Understanding the relationship between CapEx, deprecation, and the financial statement is a very important aspect of financial modeling.

In the current sample financial model, deprecation and CapEx are not forecasted to change. However as the business grows, additional equipment is needed.
In the new model, we CapEx spending in Years 5,6 and 8.
CapEx Forecast

Continue reading »

 Posted by at 9:59 AM  Tagged with: , , ,

Days Sales Outstanding, Days Payable Outstanding, and Days Sales Inventory

 Balance Sheet, Modeling  No Responses »
Dec 292011
 

Days Sales Outstanding (DSO), Days Payable Outstanding (DPO), and Inventory Turns are some key metrics for company analysis. While they are just some simple calculations, they tell are story about how a company is doing.

In the balance sheet assumptions section of the model, see below, we calculate each metric and then make assumptions about the forecast values.

Continue reading »

 Posted by at 11:37 PM  Tagged with: , , , , , , , ,

Circular References in Financial Models

 Balance Sheet, Financial Statements, General, Modeling  No Responses »
Dec 192011
 

What is a circular reference?

A circular reference is when a cell refers to itself directly or indirectly.

Are circular references bad?

In most cases, a circular reference should and can be avoided with some planning. However, in a complex financial, I found it easier to just use circular references in certain areas.

Circular References in Financial Models

Circular references are used to help calculate cash balances. Let’s walk through two typical cases.

Interest

The cash sitting in the bank generates interest. The interest income is taxed and lowers the net income. More cash -> more interest -> more tax -> lowers net income -> effects cash.

See the example below. To determine the amount of interst, we use an average of the forecasted beginning and ending cash balances. It’s not fair to use just the beginning or the ending cash balances to calculate interest because over the time period that balance will change. Continue reading »

 Posted by at 4:27 PM  Tagged with: , ,

How to Balance Your Balance Sheet

 Balance Sheet, Cash Flow Statement, Financial Statements, Income Statement, Modeling  No Responses »
Dec 092011
 

One of the hardest parts of building a financial model is getting the balance sheet to balance, meaning the basic equation of Assets = Liabilities + Shareholder’s Equity is true.

The balance sheet itself is not the problem, it is usually the cash flow statement that introduces the error.

Here are some tips to make sure your cash flow statement is correct to ensure you calculate the correct ending cash balance.

For a working model, start with the basic financial model.

General

Make sure you rebuild the historical cash flow statement with formulas, that’s the only way to ensure you’ve accounted for all numbers and everything will flow going forward.

All line items on the balance sheet must be used in the cash flow statement. Continue reading »

 Posted by at 11:26 PM  Tagged with: ,

How To Forecast The Income Statement

 Income Statement, Modeling  No Responses »
Dec 032011
 

Forecasting the income statement is the first step to building

Rebuild the historicals

To forecast the income statement, you have to understand the historicals. So start by rebuilding the financial statements.  This means taking the given values and adding formulas where necessary.

If you want to give it a shot (highly recommended), you can download the values only version and rebuild the financial statements by adding in formulas for all three financial statements. Continue reading »

 Posted by at 11:50 PM  Tagged with: , ,

Balance Sheet – Part 1

 Balance Sheet  No Responses »
Nov 302011
 

While the income statement is a tally of revenue and expenses over a period of time, a balance sheet is a snapshot of the current financial standing.

Below is a sample balance sheet.  It is part of a larger working financial model.

To keep it simple, the example includes basic line items including:

Current Assets
Cash
Account Receivable
Inventory
Prepaid Expenses
Total Current Assets
Long Term Assets
Plant, Property & Equipment, Gross
Accumulated Depreciation
Plant, Property & Equipment, Net
Total Long Term Assets
Total Assets
Current Liabilities
Account Payable
Accrued Expenses
Total Current Liabilities
Long Term Liabilities
Long Term Debt
Total Long Term Liabilities
Total Liabilities
Shareholder’s Equity
Common Equity
Retained Earnings
Total Shareholder’s Equity

 

 

 Posted by at 3:03 PM  Tagged with: , , ,

What is financial modeling?

 General  No Responses »
Nov 302011
 

Financial modeling is the building of a tool to answer questions related to budgeting/forecast, an investment, or any financial decision.

In the context of this site, financial modeling will be about forecasting the future performance of a company and related transactions using a standard three financial statement model in Excel.

 Posted by at 9:57 AM  Tagged with: ,
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