Business Valuation

N’golo Ali Koulibaly By N’golo Ali Koulibaly, 7th Jul 2018 | Follow this author | RSS Feed | Short URL http://nut.bz/22b1wn-_/
Posted in Wikinut>Business>Accounting & Finance

Business Valuation is the process of discovering the economic value of an Enterprise. It is usually direct when companies are willing to merge or acquire others companies.

The three Methods of Business Valuation

1. Public Company Comparatives or “Comps” which is the comparison of similar
company or business and their value are on the market.

2. Precedent Transaction is focusing on similar type of businesses and industries in
which the price paid for companies is pursued as an index of a company’s
value.Precedent is also known as “M&A comps” due to the fact that it involves
passed M&A transactions.

3. Discounted Cash Flow or “DCF” is a stand-alone valuation because it is not related
to other businesses. It consists of discounted future flow in order to determine the
value of a company.

Enterprise Value

Enterprise Value is defined as the aggregate value of a business considering it capital structure. It includes the Equity Value and the Net Debt. Enterprise Value is compare to EBIT, EBITDA, Sales or Revenues because there are no consideration to any debts.

EBIT= Earning Before Interest and Taxes.

EBITDA or Operating Income= Earning Before Interest and Taxes, Depreciation and Amortization.

Enterprise Value= Equity Value - Cash + Debt

Equity Value

Equity Value metrics are P/E, P/B, P/CF. They are all including consideration to debt due to the fact that these metrics are all after Interest expenses.
http://img.wikinut.com/img/i7g141fpi4v5ye20/jpeg/100x100/preview.jpeg

Equity Value or Market Capitalization= Enterprise Value + Cash - Debt

Market Cap= Stock Price x # of Shares outstanding

DCF Growing Perpetuity

By using the DCF growing perpetuity formula, we can unlock the drivers of value.

This formula is really important because by applying growing perpetuity formula to a business that is performing well, your business will be overvalued forever.
However, by applying it to a business that is not performing well, your business will be undervalued forever.

FCF refers to Free Cash Flow. It is driven by sales and marketing, business strategy, competitive advantage, cost structure…

Free cash flow can be determined by:

Method 1:
Operating Cash Flow - Capital Expenditure

Method 2:
EBIT - Taxes - Change in Working Capital + Depreciation + Amortization

Growth “g” is driven by questioning: What is the sustainable organic growth rate?
When would has it reached maturity? Has it already?

Cost of Capital is driven by risk, current capital, macro factors…

Example: Supposing that a company has a cost of debt after tax of 4.5%, a cost of equity of 8%. The debt is 63 billion, the equity is 175 billion. Therefore, the asset is 238 billion.
What is the Cost of Capital?

Cost of Capital= (63/238 x 0.045) + (175/238 x 0.08)
Cost of Capital= 0.0707 x 100
Cost of Capital= 7.07%

Price Drivers

Prices can be determined by combining elements such as:

Intrinsic value which is driven by EBITDA, Expect Growth, Cost of Capital, Capital Requirement.

Transaction structure: Is it Cash or Share?
what is the Consideration?
Is it a Merger, Joint Venture or Initial Public Offering?

Synergy and Strategic Value: Does it give diversification to another market?
Economy of Scale, Management and Employees?

Price versus value: What is the deal cost, process or negotiation?
What are the legal or others restrictions

Tags

Business Management, Business Owner, Business Planning Process, Corporations, Finance

Meet the author

author avatar N’golo Ali Koulibaly
My name is N’golo Ali Koulibaly, and I am from Côte d'Ivoire located in West Africa. I was born on august 28th, 1992.
I will focus my researches in finance especially Corporate Finance.

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Comments

author avatar Lesa Cote
19th Jul 2018 (#)

This is an amazing blog post.

Reply to this comment

author avatar N’golo Ali Koulibaly
21st Jul 2018 (#)

Thank you I appreciate.

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