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Which Lady Do You See?



   “Value, like
   beauty, is in
   the eye of the
   beholder”
Discussion Outline

Basic Business Valuation Principles
Company Life Cycle Analysis
Early-Stage Company Valuation
   Venture Capital Method
   PWERM
Later-Stage Company Valuation
Questions
Basic Business Valuation Principles

Principle of Substitution
     “The value of an item tends to be determined
     by the cost of acquiring an equally desirable
     substitute.”

   Basis for the asset-based approach –
    assumes that an equally desirable substitute
    for the business is to replicate all of the
    underlying assets and liabilities of the
    business.
Basic Business Valuation Principles

Principle of Substitution
   Basis for the market approach – assumes
    that an equally desirable substitute for the
    business is to buy a business with similar
    investment characteristics.
   Basis for the earnings approach – assumes
    that an equally desirable substitute for the
    business is a business that has similar
    earnings capacity.
Basic Business Valuation Principles

Principle of Alternatives
     “In any contemplated transaction, each party
     has alternatives to consummating the
     transaction.”

   Buyer = buy, not buy, buy something else.
   Seller = sell, not sell, sell to someone else.
Basic Business Valuation Principles

Principle of Future Benefits
     “Economic value reflects anticipated future
     benefits.”

   A buyer would not pay more for a business
    than the present value of the future benefits
    the business is expected to generate.
Basic Business Valuation Principles

Definition of Value
   Fair Market Value:
     “The price at which the property would change hands between
     a willing buyer and a willing seller when the former is not under
     any compulsion to buy and the latter is not under any
     compulsion to sell, both parties having reasonable knowledge
     of relevant facts. Court decisions frequently state in addition
     that the hypothetical buyer and seller are assumed to be able,
     as well as willing, to trade and to be well informed about the
     property and concerning the market for such property.”
     Revenue Ruling 59-60
Basic Business Valuation Principles

Definition of Value
   Market Value
     “The most probable price that a property should bring in a
     competitive and open market under all conditions requisite to a
     fair sale, the buyer and seller each acting prudently and
     knowledgeably, and assuming the price is not affected by
     undue stimulus.”
     Uniform Standards of Professional Appraisal Practice
Basic Business Valuation Principles

   Market Value assumes the consummation of
    a sale as of a specified date and the passing
    of title from seller to buyer under conditions
    whereby:
    • Buyer and seller are typically motivated;
    • Both parties are well informed or well advised and acting in
      what they consider their best interests;
    • A reasonable time is allowed for exposure in the open
      market;
    • Payment is made in terms of cash in United States dollars or
      in terms of financial arrangements comparable thereto; and
    • The price represents the normal consideration for the
      property sold unaffected by special or creative financing or
      sales concessions granted by anyone associated with the
      sale.
Company Life Cycle Analysis

                                     Company Life Cycle
Enterprise Value




                   Seed   Start-up   Growth   Established Expansion   Mature   Decline
Company Life Cycle Analysis

   Stage                             Focus                                                Financing

Seed          Proof of concept, prototype, business planning       Personal finances, friends, family, customers, grants

Start-up      Production, establish customer base                  Angels, venture capital

Growth        Infrastructure - systems, processes, effectiveness   Venture capital, mezzanine, private equity

Established   Improvement, productivity, efficiency                Profits, banks, private equity

Expansion     New markets and distribution channels                Profits, banks , private equity, IPO

Mature        Declining sales and profitability, sustain cash      Profits, banks

Exit          Valuation, transition planning                       ESOP, MBO, IPO, strategic sale, bankruptcy
Company Life Cycle Analysis

                                                                                        Methods

   Stage                             Data                         Risk      VC DFE CE GLC GPT AB Liq

Seed          Soft data, value proposition                 Extremely high   X   X

Start-up      Validation, time to market                   High             X   X

Growth        Preliminary revenue, may not be profitable   Moderate         X   X         X       X

Established   Predictable revenue, profitability           Low                  X   X     X       X   X

Expansion     Historical data, EBITDA, cash flow           Moderate             X   X     X       X   X

Mature        Historical data, EBITDA, cash flow           High                 X   X     X       X   X   X

Exit          Historical data, EBITDA, cash flow           NA                   X   X     X       X   X   X
Early-Stage Company Valuation

Why are Early-Stage Companies Valued?
     Financing
     Financial and Tax Reporting
     Gift and Estate Tax Planning
     Management of Intangible Assets
      • Internally developed or to-be-purchased intangible
        assets for sale or acquisition.
      • Royalty rates related to license of patents, etc.
      • Purchase price allocation.
Financing - Venture Capital Method

Application of method will differ depending
on stage of development.
Steps:
   Estimate future value (FV) of invested capital
    of company at proposed exit date.
     Seed usually based on a multiple of revenue
     Start-up usually based on a multiple of revenue or earnings
     Growth usually based on earnings
Financing - Venture Capital Method

   Determine cost of capital based on risk
    assessment (required rate of return).
   Venture Economics conducts an annual
    study of venture capital rates of return by
    fund type over various investment horizons.
   Cost of capital generally ranges from 30% to
    100% depending on risk assessment.
Financing - Venture Capital Method

   Factors that affect determination of required
    rate of return:
    •   Management team
    •   Phase of product development
    •   Phase of market development
    •   Revenue phase
    •   Quality and quantity of data
    •   Probability of success
Financing - Venture Capital Method

   Determine present value (PV) of invested
    capital, this is the “post-money” value:
    PV = FV / (1 + required rate of return)term
   Determine the “pre-money” value:
    Pre-money value = Post-money value minus
     Investment

   Determine the ownership fraction:
    Ownership fraction = Investment / Post-money value
Financing - Venture Capital Method

   Determine number of shares to be issued to
    investor:
      Total number of shares after issuance = Original
      number shares outstanding / (1 minus ownership
      fraction)
      Number of shares to be issued = Total number of
      shares after issuance minus original number of
      shares outstanding

   Determine price of shares:
    Investment amount / Number of shares issued
Financing - Venture Capital Method
1. Estimate Future Value:
Expected revenue in year of exit                          $ 50,000,000
Times: Revenue multiple                                            0.6
Future value of invested capital                          $ 30,000,000
2. Determine Cost of Capital (Required Rate of Return):
Required rate of return                                           50%
Number of years until exit event                                    5
Discount factor                                                  7.59
3. Determine Post-Money Value:
Future value of invested capital                          $ 30,000,000
Divided by: Discount factor                                      7.59
Present value of invested capital (Post-money value)      $ 3,952,569
Venture Capital Method

4. Determine Pre-Money Value:
Present value of invested capital (Post-money value)   $ 3,952,569
Investment                                              (2,000,000)
Pre-money value                                        $ 1,952,569
5. Calculate Ownership Fraction:
Investment                                             $ 2,000,000
Divided by: Post-money value                             3,952,569
Ownership fraction                                           50.6%
Financing - Venture Capital Method

6. Calculate Number of Share to be Issued:
Original number of shares                        2,000,000
Divided by: 1 minus ownership fraction               49.4%
Total number of shares after issuance             4,048,583
Original number of shares                        (2,000,000)
Number of shares to be issued                    2,048,583
7. Calculate Price per Share:
Investment                                   $ 2,000,000
Divided by: Number of shares to be issued      2,048,583
Price per share                              $         0.98
Financing - Venture Capital Method

Valuation Assuming Future Dilution
   If new stock is issued to later-round investors
    or to new key employees, the early-round
    investors expect to suffer dilution.
   The effect of the dilution can be built into the
    method by modeling the effect of the dilution
    and adjusting the number of shares issued in
    each round.
Financing - Venture Capital Method

Valuation Assuming Future Dilution
   The ratio of the percent ownership an
    investor holds at the terminal year of a
    project to its original percent ownership is
    that investor’s retention percent.
   In order to prevent dilution, the early
    investor’s ownership percentage should be
    increased by the ratio of the investor’s
    original percent ownership times that
    investor’s retention percent.
Financial/Tax Reporting - PWERM

Probability Weighted Expected Return
Method.
Also known as the scenario method.
Rooted in decision-tree analysis.
Future outcomes are modeled and
probability weighted.
Financial/Tax Reporting - PWERM

Along with Option Pricing Method (OPM)
and Current Value Method (CVM), PWERM
has become a generally accepted method
for financial and tax reporting purposes.
Accomplishes valuation and allocation of
enterprise value across multiple classes of
stock.
Financial/Tax Reporting - PWERM
Steps:
   Identify possible future outcomes:
    •   Initial public offering
    •   Sale or merger
    •   Continuation as a private company
    •   Dissolution
   Usually the method models both a liquidity
    scenario (sale or merger or IPO or both) and
    a going-out-of-business scenario
    (dissolution).
Financial/Tax Reporting - PWERM

   Estimate future value for each potential
    outcome
    • Best sources for revenue multiples on early-stage
      companies are VentureOne and PitchBook.
    • Analysis must consider the need for future
      financing and the milestones the company must
      pass to achieve various exit events.
Financial/Tax Reporting - PWERM

   Allocate future values to each share class.
    • Analysis should consider:
       – Dates and types of future events
       – Rights and preferences of each class

   Discount future values to present value by
    class.
    • Use risk-adjusted required rate of return for each
      class.
    • Each class may have a different required rate of
      return.
Financial/Tax Reporting - PWERM

   Assign probability to each outcome
    • The National Venture Capital Association (NCVA)
      tracks statistics on venture capital deals and the
      probability of achieving a positive liquidity event by
      financing round.
    • Based on this research, the probability of achieving
      a positive liquidity event for a deal declined from
      25% to 40% in 2002 to 2% to 10% in 2009,
      depending on the round.
Financial/Tax Reporting - PWERM

    • Based on this research, the probability of:
       – Sale or merger - approximately 10%
       – IPO - approximately 4%
    • 85% of deals do not generate a positive liquidity
      event.
Financial/Tax Reporting - PWERM

   Determine enterprise value by summing the
    probability-weighted outcomes.
   Determine the value per share by dividing
    the enterprise value by the number of shares
    outstanding.
Financial/Tax Reporting - PWERM

 Facts:                                 Series A    Series B    Common         Total
 Valuation Date                                                             End of Year 4
 Number of shares                       3,405,405   1,317,735   2,000,000     6,723,140
 Percentage ownership                       50.6%       19.6%       29.8%        100.0%
1. Identify Possible Future Outcomes:
 Initial Public Offering                                                    5 years
 Sell to Private Equity Firm                                                8 years
 Continue as a Private Firm                                                 8 years
 Dissolution                                                                8 years
Financial/Tax Reporting - PWERM

2. Estimated Future Value for Each Potential Outcome:
 Initial Public Offering
     Revenue of $50,000,000 x MVIC/revenue multiple of 0.60   $ 30,000,000
 Sell to Private Equity Firm
     EBITDA of $5,000,000 x MVIC/EBITDA multiple of 7         $ 35,000,000
 Continue as a Private Firm
    EBITDA of $5,000,000 x MVIC/EBITDA multiple of 4          $ 20,000,000
 Dissolution                                                  $ 5,000,000
Financial/Tax Reporting - PWERM

3. Allocate Future Value to Each Share Class:    Series A     Series B    Common         Total
 Percentage ownership                                 50.6%       19.6%        29.8%       100.0%
 Future Value:
     Initial Public Offering                    $ 15,180,000 $ 5,880,000 $ 8,940,000 $ 30,000,000
     Sell to Private Equity Firm                  17,710,000   6,860,000  10,430,000   35,000,000
     Continue as a Private Firm                   10,120,000   3,920,000   5,960,000   20,000,000
     Dissolution                                   2,530,000     980,000   1,490,000    5,000,000
Financial/Tax Reporting - PWERM

4. Discount Future Value to Present Value:    Series A       Series B       Common       Total
 Required rate of return                            25%            25%          30%
 Years until:
     Initial Public Offering                             1              1            1
     All other events                                    3              3            3
 Discount Factor:
     Initial Public Offering                       125%           125%          130%
     All other events                              195%           195%          220%
 Present Value:
     Initial Public Offering                 $ 12,144,000 $ 4,704,000 $ 6,877,000 $ 23,725,000
     Sell to Private Equity Firm                9,068,000   3,512,000   4,747,000   17,327,000
     Continue as a Private Firm                 5,181,000   2,007,000   2,713,000    9,901,000
     Dissolution                                1,295,000     502,000     678,000    2,475,000
Financial/Tax Reporting - PWERM

5. Assign Probability to Each Outcome:                                                            Total
Initial Public Offering                                                                                   10%
Sell to Private Equity Firm                                                                               20%
Continue as a Private Firm                                                                                65%
Disssolution                                                                                               5%
6. Determine Enterprise Value and Value per Share:       Series A      Series B      Common       Total
Initial Public Offering                              $ 1,214,000 $ 470,000 $ 688,000 $ 2,372,000
Sell to Private Equity Firm                            1,814,000    702,000   949,000  3,465,000
Continue as a Private Firm                             3,368,000  1,305,000 1,763,000  6,436,000
Disssolution                                              65,000     25,000    34,000    124,000
Total enterprise value                               $ 6,461,000 $ 2,502,000 $ 3,434,000 $ 12,397,000
Divided by: Number of shares outstanding               3,405,405   1,317,735   2,000,000    6,723,140
Value per share outstanding                          $        1.90 $        1.90 $       1.72 $       1.84
Later-Stage Company Valuation

Why are Later-Stage Companies Valued?
   Exit Planning
    •   Sale to employees (ESOP)
    •   Sale to management (MBO, stock options)
    •   Gift/bequest to family members (FLPs)
    •   Charitable contributions
   Financial and Tax Reporting
    • Purchase price allocation (FASB 141R)
    • Goodwill impairment (FASB 142)
    • Equity compensation (FASB 123R, 409A)
Later-Stage Company Valuation

Use Traditional Valuation Methods
     Discounted Future Earnings
     Capitalization of Earnings
     Guideline Public Companies
     Guideline Private Transactions
     Adjusted Net Assets
      • Going-Concern        Mass Assemblage of Assets
      • Orderly Disposition  Forced Liquidation

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Business valuation throughout a business's life cycle, march 11, 2010 (1)

  • 1. Which Lady Do You See? “Value, like beauty, is in the eye of the beholder”
  • 2. Discussion Outline Basic Business Valuation Principles Company Life Cycle Analysis Early-Stage Company Valuation  Venture Capital Method  PWERM Later-Stage Company Valuation Questions
  • 3. Basic Business Valuation Principles Principle of Substitution “The value of an item tends to be determined by the cost of acquiring an equally desirable substitute.”  Basis for the asset-based approach – assumes that an equally desirable substitute for the business is to replicate all of the underlying assets and liabilities of the business.
  • 4. Basic Business Valuation Principles Principle of Substitution  Basis for the market approach – assumes that an equally desirable substitute for the business is to buy a business with similar investment characteristics.  Basis for the earnings approach – assumes that an equally desirable substitute for the business is a business that has similar earnings capacity.
  • 5. Basic Business Valuation Principles Principle of Alternatives “In any contemplated transaction, each party has alternatives to consummating the transaction.”  Buyer = buy, not buy, buy something else.  Seller = sell, not sell, sell to someone else.
  • 6. Basic Business Valuation Principles Principle of Future Benefits “Economic value reflects anticipated future benefits.”  A buyer would not pay more for a business than the present value of the future benefits the business is expected to generate.
  • 7. Basic Business Valuation Principles Definition of Value  Fair Market Value: “The price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts. Court decisions frequently state in addition that the hypothetical buyer and seller are assumed to be able, as well as willing, to trade and to be well informed about the property and concerning the market for such property.” Revenue Ruling 59-60
  • 8. Basic Business Valuation Principles Definition of Value  Market Value “The most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus.” Uniform Standards of Professional Appraisal Practice
  • 9. Basic Business Valuation Principles  Market Value assumes the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: • Buyer and seller are typically motivated; • Both parties are well informed or well advised and acting in what they consider their best interests; • A reasonable time is allowed for exposure in the open market; • Payment is made in terms of cash in United States dollars or in terms of financial arrangements comparable thereto; and • The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.
  • 10. Company Life Cycle Analysis Company Life Cycle Enterprise Value Seed Start-up Growth Established Expansion Mature Decline
  • 11. Company Life Cycle Analysis Stage Focus Financing Seed Proof of concept, prototype, business planning Personal finances, friends, family, customers, grants Start-up Production, establish customer base Angels, venture capital Growth Infrastructure - systems, processes, effectiveness Venture capital, mezzanine, private equity Established Improvement, productivity, efficiency Profits, banks, private equity Expansion New markets and distribution channels Profits, banks , private equity, IPO Mature Declining sales and profitability, sustain cash Profits, banks Exit Valuation, transition planning ESOP, MBO, IPO, strategic sale, bankruptcy
  • 12. Company Life Cycle Analysis Methods Stage Data Risk VC DFE CE GLC GPT AB Liq Seed Soft data, value proposition Extremely high X X Start-up Validation, time to market High X X Growth Preliminary revenue, may not be profitable Moderate X X X X Established Predictable revenue, profitability Low X X X X X Expansion Historical data, EBITDA, cash flow Moderate X X X X X Mature Historical data, EBITDA, cash flow High X X X X X X Exit Historical data, EBITDA, cash flow NA X X X X X X
  • 13. Early-Stage Company Valuation Why are Early-Stage Companies Valued?  Financing  Financial and Tax Reporting  Gift and Estate Tax Planning  Management of Intangible Assets • Internally developed or to-be-purchased intangible assets for sale or acquisition. • Royalty rates related to license of patents, etc. • Purchase price allocation.
  • 14. Financing - Venture Capital Method Application of method will differ depending on stage of development. Steps:  Estimate future value (FV) of invested capital of company at proposed exit date. Seed usually based on a multiple of revenue Start-up usually based on a multiple of revenue or earnings Growth usually based on earnings
  • 15. Financing - Venture Capital Method  Determine cost of capital based on risk assessment (required rate of return).  Venture Economics conducts an annual study of venture capital rates of return by fund type over various investment horizons.  Cost of capital generally ranges from 30% to 100% depending on risk assessment.
  • 16. Financing - Venture Capital Method  Factors that affect determination of required rate of return: • Management team • Phase of product development • Phase of market development • Revenue phase • Quality and quantity of data • Probability of success
  • 17. Financing - Venture Capital Method  Determine present value (PV) of invested capital, this is the “post-money” value: PV = FV / (1 + required rate of return)term  Determine the “pre-money” value: Pre-money value = Post-money value minus Investment  Determine the ownership fraction: Ownership fraction = Investment / Post-money value
  • 18. Financing - Venture Capital Method  Determine number of shares to be issued to investor: Total number of shares after issuance = Original number shares outstanding / (1 minus ownership fraction) Number of shares to be issued = Total number of shares after issuance minus original number of shares outstanding  Determine price of shares: Investment amount / Number of shares issued
  • 19. Financing - Venture Capital Method 1. Estimate Future Value: Expected revenue in year of exit $ 50,000,000 Times: Revenue multiple 0.6 Future value of invested capital $ 30,000,000 2. Determine Cost of Capital (Required Rate of Return): Required rate of return 50% Number of years until exit event 5 Discount factor 7.59 3. Determine Post-Money Value: Future value of invested capital $ 30,000,000 Divided by: Discount factor 7.59 Present value of invested capital (Post-money value) $ 3,952,569
  • 20. Venture Capital Method 4. Determine Pre-Money Value: Present value of invested capital (Post-money value) $ 3,952,569 Investment (2,000,000) Pre-money value $ 1,952,569 5. Calculate Ownership Fraction: Investment $ 2,000,000 Divided by: Post-money value 3,952,569 Ownership fraction 50.6%
  • 21. Financing - Venture Capital Method 6. Calculate Number of Share to be Issued: Original number of shares 2,000,000 Divided by: 1 minus ownership fraction 49.4% Total number of shares after issuance 4,048,583 Original number of shares (2,000,000) Number of shares to be issued 2,048,583 7. Calculate Price per Share: Investment $ 2,000,000 Divided by: Number of shares to be issued 2,048,583 Price per share $ 0.98
  • 22. Financing - Venture Capital Method Valuation Assuming Future Dilution  If new stock is issued to later-round investors or to new key employees, the early-round investors expect to suffer dilution.  The effect of the dilution can be built into the method by modeling the effect of the dilution and adjusting the number of shares issued in each round.
  • 23. Financing - Venture Capital Method Valuation Assuming Future Dilution  The ratio of the percent ownership an investor holds at the terminal year of a project to its original percent ownership is that investor’s retention percent.  In order to prevent dilution, the early investor’s ownership percentage should be increased by the ratio of the investor’s original percent ownership times that investor’s retention percent.
  • 24. Financial/Tax Reporting - PWERM Probability Weighted Expected Return Method. Also known as the scenario method. Rooted in decision-tree analysis. Future outcomes are modeled and probability weighted.
  • 25. Financial/Tax Reporting - PWERM Along with Option Pricing Method (OPM) and Current Value Method (CVM), PWERM has become a generally accepted method for financial and tax reporting purposes. Accomplishes valuation and allocation of enterprise value across multiple classes of stock.
  • 26. Financial/Tax Reporting - PWERM Steps:  Identify possible future outcomes: • Initial public offering • Sale or merger • Continuation as a private company • Dissolution  Usually the method models both a liquidity scenario (sale or merger or IPO or both) and a going-out-of-business scenario (dissolution).
  • 27. Financial/Tax Reporting - PWERM  Estimate future value for each potential outcome • Best sources for revenue multiples on early-stage companies are VentureOne and PitchBook. • Analysis must consider the need for future financing and the milestones the company must pass to achieve various exit events.
  • 28. Financial/Tax Reporting - PWERM  Allocate future values to each share class. • Analysis should consider: – Dates and types of future events – Rights and preferences of each class  Discount future values to present value by class. • Use risk-adjusted required rate of return for each class. • Each class may have a different required rate of return.
  • 29. Financial/Tax Reporting - PWERM  Assign probability to each outcome • The National Venture Capital Association (NCVA) tracks statistics on venture capital deals and the probability of achieving a positive liquidity event by financing round. • Based on this research, the probability of achieving a positive liquidity event for a deal declined from 25% to 40% in 2002 to 2% to 10% in 2009, depending on the round.
  • 30. Financial/Tax Reporting - PWERM • Based on this research, the probability of: – Sale or merger - approximately 10% – IPO - approximately 4% • 85% of deals do not generate a positive liquidity event.
  • 31. Financial/Tax Reporting - PWERM  Determine enterprise value by summing the probability-weighted outcomes.  Determine the value per share by dividing the enterprise value by the number of shares outstanding.
  • 32. Financial/Tax Reporting - PWERM Facts: Series A Series B Common Total Valuation Date End of Year 4 Number of shares 3,405,405 1,317,735 2,000,000 6,723,140 Percentage ownership 50.6% 19.6% 29.8% 100.0% 1. Identify Possible Future Outcomes: Initial Public Offering 5 years Sell to Private Equity Firm 8 years Continue as a Private Firm 8 years Dissolution 8 years
  • 33. Financial/Tax Reporting - PWERM 2. Estimated Future Value for Each Potential Outcome: Initial Public Offering Revenue of $50,000,000 x MVIC/revenue multiple of 0.60 $ 30,000,000 Sell to Private Equity Firm EBITDA of $5,000,000 x MVIC/EBITDA multiple of 7 $ 35,000,000 Continue as a Private Firm EBITDA of $5,000,000 x MVIC/EBITDA multiple of 4 $ 20,000,000 Dissolution $ 5,000,000
  • 34. Financial/Tax Reporting - PWERM 3. Allocate Future Value to Each Share Class: Series A Series B Common Total Percentage ownership 50.6% 19.6% 29.8% 100.0% Future Value: Initial Public Offering $ 15,180,000 $ 5,880,000 $ 8,940,000 $ 30,000,000 Sell to Private Equity Firm 17,710,000 6,860,000 10,430,000 35,000,000 Continue as a Private Firm 10,120,000 3,920,000 5,960,000 20,000,000 Dissolution 2,530,000 980,000 1,490,000 5,000,000
  • 35. Financial/Tax Reporting - PWERM 4. Discount Future Value to Present Value: Series A Series B Common Total Required rate of return 25% 25% 30% Years until: Initial Public Offering 1 1 1 All other events 3 3 3 Discount Factor: Initial Public Offering 125% 125% 130% All other events 195% 195% 220% Present Value: Initial Public Offering $ 12,144,000 $ 4,704,000 $ 6,877,000 $ 23,725,000 Sell to Private Equity Firm 9,068,000 3,512,000 4,747,000 17,327,000 Continue as a Private Firm 5,181,000 2,007,000 2,713,000 9,901,000 Dissolution 1,295,000 502,000 678,000 2,475,000
  • 36. Financial/Tax Reporting - PWERM 5. Assign Probability to Each Outcome: Total Initial Public Offering 10% Sell to Private Equity Firm 20% Continue as a Private Firm 65% Disssolution 5% 6. Determine Enterprise Value and Value per Share: Series A Series B Common Total Initial Public Offering $ 1,214,000 $ 470,000 $ 688,000 $ 2,372,000 Sell to Private Equity Firm 1,814,000 702,000 949,000 3,465,000 Continue as a Private Firm 3,368,000 1,305,000 1,763,000 6,436,000 Disssolution 65,000 25,000 34,000 124,000 Total enterprise value $ 6,461,000 $ 2,502,000 $ 3,434,000 $ 12,397,000 Divided by: Number of shares outstanding 3,405,405 1,317,735 2,000,000 6,723,140 Value per share outstanding $ 1.90 $ 1.90 $ 1.72 $ 1.84
  • 37. Later-Stage Company Valuation Why are Later-Stage Companies Valued?  Exit Planning • Sale to employees (ESOP) • Sale to management (MBO, stock options) • Gift/bequest to family members (FLPs) • Charitable contributions  Financial and Tax Reporting • Purchase price allocation (FASB 141R) • Goodwill impairment (FASB 142) • Equity compensation (FASB 123R, 409A)
  • 38. Later-Stage Company Valuation Use Traditional Valuation Methods  Discounted Future Earnings  Capitalization of Earnings  Guideline Public Companies  Guideline Private Transactions  Adjusted Net Assets • Going-Concern  Mass Assemblage of Assets • Orderly Disposition  Forced Liquidation

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