Private Company

Valuation
David Lamb
Prospect Research Consultant
Blackbaud Analytics
 Agenda

Business 101
Valuation concepts
Tools for valuation
Making it practical for
fundraising
Business 101
 Closely held stock

 When a company incorporates, it issues

shares, known as “outstanding stock”
 The value of the company is divided
evenly among the shares
 “Publicly held” stock vs. “closely held”
 Finding the value of public company
stock is easy
 Finding the value of private company
stock is difficult and expensive
 Why value a company?
 The value of a company is influenced by
the reason you’re asking the question
 Reasons to value a private company:
 To sell it
 To raise capital from investors
 Part of a divorce settlement
 For a management buyout
 For estate planning
 For an employee stock ownership plan
 For taxation
 Change the purpose of the valuation and
you change the stock price
 Only fundraisers ask how it affects a gift
 What is it worth?
 What is a company worth?
 It’s worth the tangible assets
 It’s worth the assets + goodwill
 It’s worth whatever someone will pay for it

 Situations that increase the value:

A great product or service that people want to buy
 Customers who can afford to buy it

 Situations that decrease the value:

 An obscure product or service with limited appeal
 Price is too high or customers are too poor
Valuation Concepts
Valuation in the real world
 Information typically is not available
on private companies
 The value of a company is not
necessarily identical to the bottom
line on the balance sheet
 Companies with a negative cash flow
can have a high value
 Companies with a positive cash flow
might have a modest value
Valuation in the real world

 To find out what a company is worth, sell it

 Value is partly (sometimes mostly)
subjective
 Sometimes D&B provides a net worth
figure
 Read everything you can about your target
company – it’s not just numbers
Various ways to measure
value
Book value
Price/earnings ratio (P/E)
Discounted cash flow
Comparison to similar
companies
 Comparable companies
 Find a similar public company
 Downside: a public company is almost always
valued higher than an otherwise equivalent
private company would be
 Find
a similar private company that sold
recently
 Downside: the only commonly available metric is
sales, and value is not always clearly tied to sales
or even profit
 Comparison is only method that is possible if
you have no access to the financial
statements and appraisals of the assets is
comparable companies
Valuation Tools
 Comparison to public
companies
 Yahoo Stock Screener (http://
screen.yahoo.com/stocks.html)
 Parameters that can be used
 Industry (SIC or NAICS)
 Sales
 Enter relevant info for the target
company
 Look for Market Cap.
 Your target company value is probably
considerably less
 Comparison
considerations
 Your prospect’s industry and company sales
rarely match those offered by Yahoo perfectly
 Public companies tend to be much larger than
their private counterparts
 Read the profile to see if the comparison company
is similar in purpose to the target
 If the public company has flat or negative
earnings, it may still have value
 Same may be true of the private company
Comparison to other private
cos
 Business Valuation Resources (www.bvmarketdata.com)
 Pratt’s Stats
 Database of over 9,500 private company sales from 1990 to present
 Deal price ranges from $1 million to $14.4 billion
 Updated monthly with about 100 transactions added / month
 $595

 Bizcomps
 Database of over 9,500 private company sales from 1993 to present
 61% of the companies have gross revenues less than $500K
 18% of the companies have gross revenues over $1 million
 $395

 INC. Magazine’s Ultimate Valuation Guide

INC.’s 2006 Valuation
Guide
INC.’s 2006 Valuation Guide
 BizStats.com

Select the industry

Enter the sales
Many elements of the cash
flow statement are shown
including an estimate of
retained earnings
 BizStats.com rules of
Type of Business
thumb "Rule of Thumb" valuation

Accounting Firms 100% - 125% of annual revenues

Auto Dealers 2-3 years net income + tangible assets

Book Stores 15% of annual sales + inventory

Coffee Shops 40% - 45% of annual sales + inventory

Dental Practices 60% - 70% of annual revenues

Dry Cleaners 70% - 100% of annual sales

Engineering practices 40% of annual revenues

Florists 34% of annual sales + inventory

Food/Gourmet Shops 20% of annual sales + inventory

Furniture & Appliance Stores 15% - 25% of annual sales + inventory

Gas Stations 15% - 25% of annual sales + equip/inventory

Gift & Card Shops 32% - 40% of annual sales + inventory

Grocery Stores 11% - 18% of annual sales + inventory

 Business classifieds

BizBuySell
GlobalBX
Search for business by line
of business and state
Making it practical
 Case Situation
 Privatelyowned grocery chain (2 stores) in
Nebraska
 Founded in 1955
 405 employees
 D&B reports sales of $45.8 million
 200,000 square feet
 No trend information is available
 Major competition is a Super WalMart,
recently arrived
 Prospect is the son of the deceased
founder
 Using valuation guides
 INC. Guide
 Median sales for grocery stores: $773M
 Median sale price: $200M
 Valuation multipliers:
Best:4.47
Second and third best: 0.27

 BizStats Guideline
 11-18% of annual sales + inventory
 Using valuation guides
 Estimates using INC:
 Sales of the target are well below the median,
encouraging us to consider a lower estimated value
 Using the second best multiplier: 0.27
$46 million = $12.42 million
 Estimate using BizStats rules of thumb
 11% of sales ≈ $5 million + inventory
 18% of sales ≈ $8.2 million + inventory
 Business classifieds
 BizBuySell (search on 9/12/06)
 No grocery stores found in Nebraska
 Widened the search to include surrounding
states
 Results:
BizBuySell 1
BizBuySell 2
BizBuySell 3
Estimated Company Value -
Summary
 Target company sales: $46 million
 Based on classifieds found, the target company is
larger than most in the region
 Known, but smaller stores are asking the low 6-
figures
 BV Resources (aka INC valuation guide) value:
 Median revenue = $773 million
 Low sales price = $14 million
 Median sales price = $200 million
 High sales price = $1.6 billion
 BV Resources multiplier
 4.47*$46 million =$205.6 million
 0.27*$46 million = $12.4 million
 D&B reported net worth: $6.9 million
 Biz Stats rule of thumb for grocery stores = $5
million to 8.2 million + inventory
 Estimated Value
The target company is worth
$300,000-600,000
$2,000,000-10,000,000
$10,000,000-20,000,000
Over $50,000,000
None of the above
I haven’t got a clue
 Making sense of it all
 The problem of company valuation is the
same as for personal net worth:
you can’t get the necessary information
 The good news: you don’t need to pin
down the precise value
 You’d like to know:
 If it’s $1M vs $100M
 If it’s a going concern
 If the industry is above or below the diagonal
on the INC chart.
 Making sense of it all
Distribution of a sse ts a cross ne t w orth

19.0%
20.0% 17.0%
18.0%
16.0%
14.0% 12.0%
11.0%
12.0% 9.0%
10.0% 8.0% 7.0% 8.0% 8.0%
8.0%
6.0%
4.0%
2.0%
0.0%

Households with a net worth of $1-$10 million, 2001 IRS data, published in 2006
If the prospect owns 50%
 Assume a company value of between $2
million and $10 million
 The prospect’s share in the target
company could be between
 $5M (50% of $10 M) and
 $1M (50% of $2 M)
 Let’s split the difference at $3 million
 Reduce the proportions of net worth (from
the IRS chart) for property and stock
because of the semi-rural area
 This makes closely held stock a higher
percentage of the prospect’s net worth –
say 25%
If the prospect owns 50%

Net worth could be about

$12 million (private
company ownership of $3
million x 4)
2%-5% might be
philanthropic capacity
Capacity ≈ $240,000-
$600,000
Consolidated resource list
 Yahoo! Stock Screener:
screen.yahoo.com/stocks.html
 BV Resources: www.bvmarketdata.com
 Inc. Valuation Guide:
www.inc.com/valuation/index.html
 BizStats: www.bizstats.com
 BizBuySell: bizbuysell.com
 GlobalBX: www.globalbx.com
 www.lambresearch.com
 White Paper
www.blackbaud.com/resources/white-papers.aspx