Private Company Valuation

[@nathancarranza9860]

Maybe most people are use to it already, but it does not cease to amaze me at the incredible education one can receive for absolutely no cost or very little. This channel is GREAT.

[@masterclassoptionstrading2784]

Yes are absolutely right. You can earn the equivalent of a MBA or PDH (knowledge wise) if you subscribe to the right channels. :-)

[@juanshaftpatel7488]

this isnt an education dummy.. its a sales pitch

[@marcelochaix9227]

I learn more from this channel than from my finance career at college

[@financialmodeling]

Thanks for watching!

[@Fayste69]

Thank you for this great tutorial! I'm interviewing for IB and PE at the moment, and your resources really help. Cheers

[@financialmodeling]

+Fayste69 Thanks for watching!

[@alexandervaltsev6937]

This is yet another great piece of finance education!

[@financialmodeling]

+Александр Вальцев Thanks for watching!

[@bea_lopez818]

This channel is helping my study for my final. Thank you 😊

[@financialmodeling]

Thanks for watching!

[@anthonyminniti17]

Great video! Thank you for sharing

[@financialmodeling]

Thanks for watching!

[@pranaysuhalka]

Really Well Explained Video.

[@marcelokneese5387]

quite applicable fopr Middle Market M&A players

[@financialmodeling]

Thanks for watching!

[@YongyotKorean]

Thank you so much for your video. ^_^

[@forfreedomssake4315]

Thanks

[@financialmodeling]

Thanks for watching!

[@alexandrete835]

Once again, an excellent video! thx

[@financialmodeling]

Thanks for watching!

[@RJFamily-bg7fr]

Great video! I understand that you said valuation for "empire" business will be discounted less than say "Money" business or "Meth" business, but how do we estimate the discount %? And I assume that we are discounting for both TV and Enterprise value.

[@financialmodeling]

There's no scientific way to do it. You could look at recent precedent transactions for private vs. public companies and estimate it like that (e.g., based on the % reduction in multiples), or you could base it on something like the "size premium" in the Cost of Equity and look at the percentage discount that extra premium implies when applied to the Discount Rate calculation.

[@gmoneylxp]

For DCF problems @16.56, i know not having beta is a problem as you can't calculate cost of equity using CAPM, but why is not having market capitalization a problem? Great vid

[@financialmodeling]

Because you need the market capitalization to re-lever Beta based on the company's own capital structure (if you're calculating Cost of Equity that way rather than using the median capital structure of the comparable companies).

[@tyeweaver1]

I'm having a bit of trouble understanding why we wouldn't discount the precedent transaction multiples when valuing a private company. I get why we do discount the public company comps, since private companies are less liquid than public ones. By why would we not discount the precedent transactions multiples?

[@financialmodeling]

Because precedent transactions already reflect the control premium paid for the other company, regardless of whether the other company was public or private.

[@tangpingtao]

Do bankers use templates for modeling or they have to do everything from the scratch? For example, do they calculate Betas manaully or just connect the excel to Capital IQ?

[@financialmodeling]

Depends on the purpose of the analysis... you rarely calculate Beta manually, you almost always get it from Bloomberg.

[@naturalproductscoconutoil4773]

What do you mean by "Normalize the categories"? Converting them to GAAP?

[@financialmodeling]

Yes

[@annu26100]

@Mergers & Inquisitions / Breaking Into Wall Street I have one more question. I was using this model for a canadian company but unfortunately there is no listed competitor in canadian stock exchane. So i used US based company for comparatives. In that case should i use risk free rate, market premium and cost of debt etc for canadian market or us based market ?

[@financialmodeling]

Risk-free rate should be based on the subject company's currency, but the market premium and cost of debt can be based on the comparables.

[@anhquaranta9909]

How do you determine the different multiples such as maximum multiple, 75th percent multiple as indicated in the ValSum tab of the workbook that you have for this video? Do you have a video explaining the methodology that you used to determine the multiples? Also, do you use the discount method and terminal value method to arrive at 2 different valuations and compare the final result from each method with each other? What is the point of determining terminal value method in private company valuation? Thanks you so much for your help!

[@financialmodeling]

You're asking about questions that are either beyond the scope of this tutorial or that have been covered elsewhere in this channel; please see the Valuation and DCF playlists or look up the lessons on Terminal Value to get answers to those questions. There is nothing special with determining the 25th percentile/75th percentile/median and so on - it's just simple statistics applied to the full range of multiples from comparable public companies.

[@markjimmy3308]

In calculating debt to equity ratio , should the equity be balance sheet figure or market value?

[@financialmodeling]

Ideally the Market Value, but if you can't find it or estimate it in any way, you could just use the Book Value... and it's usually not a huge problem for smaller, private companies that sell for low valuation multiples anyway.

[@Ice-qq1or]

Is there anyway I can get a copy of the excel spreadsheet you used in the video?

[@financialmodeling]

Click "Show More." Click the link. Click again.

[@annu26100]

How do you get forward year 1 and Forward year 2 revenue, EBITDA and NEt profit for public company ?

[@financialmodeling]

Look on Yahoo Finance, Bloomberg, Capital IQ, etc. to find consensus estimates. FinViz can also be helpful.

[@annu26100]

@@financialmodeling thank you very much !. I have one more question. I was using this model for a canadian company but unfortunately there is no listed competitor in canadian stock exchane. So i used US based company for comparatives. In that case should i use risk free rate, market premium and cost of debt etc for canadian market or us based market ?

[@ayusharora4469]

How can we calculate private co. Unleveraged beta using a industry's levered beta ???

[@financialmodeling]

Un-lever it based on the median capital structure percentages for comparable public companies in the same industry.

[@borimapa]

what is the work flow involved in valuing a mining company that is not listed on the stock exchange?

[@financialmodeling]

You would use something similar to a NAV model... look at the company's total reserves, assuming a certain production level and production decline until the reserves are depleted, and then calculate and discount the cash flows from that production. If the company has land that it has not yet developed mines on, assume they do in future years and make that additional production influence the total as well.

[@corporate-fugitive]

What would be the general EV or Mkt Cap range of a 'Meth' business compared to an ' Empire' business?

[@financialmodeling]

A true "small business" is generally worth $10 million USD or less, all the way down to the hundreds of thousands (or less). Large public companies are almost always worth at least $50 - $100 million and often a lot more than that. But private companies with the same setup could also be worth something in that range. Venture-backed startups could be worth almost anything, from low millions in the first funding round to billions or tens of billions shortly before going public (Lyft and Uber). But it's fair to say that the average legitimate, profitable, large private company is worth more than the average startup... outliers can skew this.

[@MosesTheExplorer]

If I understood correctly, for a private company that doesn't have a Beta, you'll look at the comparable's (public) capital structure, and then take the median of the comps' unlevered Beta, and use it as your Beta. What if there were no comparables?!

[@financialmodeling]

Then you would need some other way to estimate Beta, such as looking at the company's earnings variance vs. the earnings of the S&P 500, or the targeted returns for your portfolio, or the industry-wide Beta, or something else like that.

[@MosesTheExplorer]

Mergers & Inquisitions / Breaking Into Wall Street thanks. I'm wondering about PE, so does the SP500 would be a good benchmark?

[@jugalharpalani9461]

Could you please tell me what the mid year means when you discounted the cash flows ?

[@financialmodeling]

The mid-year convention means that we assume the cash flow arrives in the middle of the year rather than entirely at the end, to represent the fact that cash flow is generated over the course of the year - not just at the end. This is slightly more accurate than using the year-end convention.

[@너부리맨]

I even love your voice! OMG

[@너부리맨]

It is super sweet... :) AWWW

[@financialmodeling]

Thanks for watching!

[@oliviagao9936]

Can we still use WACC as the discount rate when the capital structure changes over the years?

[@financialmodeling]

Yes, you just have to change WACC over time and use a cumulative discount factor each year that factors in the changing WACC. WACC in the Terminal Period should represent what you expect the company's long-term capital structure to be, which should probably be close to the capital structure of peer companies.

[@oliviagao9936]

@@financialmodeling Thanks so much! this is very helpful!

[@alekxu]

Hi, great videos thank you. Just one quick point, 17:00 what do you mean by 'median "total" unlevered beta' of 1.93? How did you calculate it? Thanks!

[@financialmodeling]

Do a Google search for "Total Betas by Sectors" - it is based on an entire sector and its correlation to the market as a whole, since private companies do not have stock prices and stock trading histories.

[@hengjinglow3109]

Hi great video! Was wondering why did you not take the unlevered beta of 1.15 instead since you are comparing with its peers?

[@cutdepiefails6596]

What about small business with empire business revenue? Never sell business?

[@financialmodeling]

What is your question? Are you asking if you should never sell a business if it gets to a certain revenue level? I can't really answer that question because it depends on your goals and how much you want money now vs. future growth potential later. If you can get tens of millions of dollars and you really want to have a good life and not work, you should probably sell, even if you get a low multiple for the business. If not, or if you want to focus on work/career, you should probably not sell.

[@cutdepiefails6596]

For example, a private small business that has a turnover of 100M profit year, with a cost of operation below 4M, no debt. How would you evaluate?

[@financialmodeling]

Again, your question is unclear so I have no answer. Are you asking how you would *value* that business? Or if you should sell it or keep running it? Even a business at that scale would not get a high multiple if it's highly dependent on its owner or a small group of people and can't be run by an outside management team with systems and processes.

[@corporate-fugitive]

Thanks for the video. How would one estimate the target firm's EBITDA if it does not publish any information other than last year's revenue? I'm stuck because I created the Peer Universe and calculated multiples, but the only info published on the target is 2018's Revenue.

[@financialmodeling]

You can't do much. Maybe look at peer companies in the industry that are public and apply their margins to your company. Or gain access to something like Capital IQ, privco.com, etc. that lists private company information.

[@corporate-fugitive]

Mergers & Inquisitions / Breaking Into Wall Street Thanks for the prompt reply. I have access to PitchBook via my university which I have been using; however, I find for most of the private companies their EBITDA is not published. I’m trying to make a “mock PitchBook” to show competency in IB interviews; would you have any suggestions on valuation? Or should I just try to find a private company who’s EBITDA is published?

[@financialmodeling]

I don't know, there are example valuations in this channel and elsewhere on the sites. You need some information to work with, so try to find a private company with at least some published information. Try picking a larger public company, like SAS Institute, with somewhat-known financial figures, rather than small businesses.

[@corporate-fugitive]

Mergers & Inquisitions / Breaking Into Wall Street Thank you!! You guys are incredible

[@CharIesMarteI]

Could have used this like 6 months ago during recruitment season lol

[@financialmodeling]

+Casimir III We created the tutorials and added them to our course in March 2015...

[@CharIesMarteI]

+Mergers & Inquisitions / Breaking Into Wall Street the video does an excellent job of explaining it though and would have ironed out flaws in my understanding. But yeah I read a lot of the site last year as well

[@JKook808]

Korean companies! 🙌

[@financialmodeling]

Hey, we try to be as international as possible...

[@JKook808]

@@financialmodeling Yeah, that's great! I have really enjoyed and learned a lot from your videos. Thank you!

[@wenkaiyang1487]

look no further than breaking into wall street

[@financialmodeling]

Thanks for watching!

[@alishlalani2751]

Spoilers man!