BV: Cse Anlysis Completed Trnsction & Guideline Public Comprble MARKET APPROACH The Mrket Approch to Vluing Businesses (Second Edition) Shnnon P. Prtt This mteril is reproduced from The Mrket Approch to Vluing Businesses (Second Edition) by Shnnon P. Prtt with permission of John Wiley & Sons, Inc. 1995 2013 by Ntionl Assocition of Certified Vlutors nd Anlysts (NACVA). All rights reserved. Mrket Chpters 1 Used by Institute of Business Apprisers with permission of NACVA for limited purpose of collbortive trining. 2013.v2
MARKET APPROACH BV: Cse Anlysis Completed Trnsction & Guideline Public Comprble 2 Mrket Chpters 1995 2013 by Ntionl Assocition of Certified Vlutors nd Anlysts (NACVA). All rights reserved. 2013.v2 Used by Institute of Business Apprisers with permission of NACVA for limited purpose of collbortive trining.
Compiling Useful Mrket Vlue Tbles Chpter 9 Two Distinct Alterntives in Mrket Multiples Direct Vlution of Equity Vluing Totl Invested Cpitl Exmples of Mrket Vlue Tbles Subject Compny to Guideline Publicly Trded Compnies Subject Compny to Comprtive Trnsctions in Prtt s Stts Summry The purpose of gthering dt on guideline compnies is to derive some benchmrks by which to vlue the subject privtely held compny. We strt by gthering group of compnies tht will be used for comprison; those compnies my be public compnies used in the guideline public compny method or either public or privtely held compnies used in the comprtive trnsction method (lso know s the mergers nd cquisitions method). We then construct tbles presenting the finncil fundmentls nd the resulting vlution multiples for ech compny. Mrket vlue tbles, for presenttion in vlution report, cn tke severl forms. In this chpter we will review the subject compny to guideline compnies: Subject compny to guideline publicly trded compnies Subject compny to other comprtive privte trnsctions Presenting mrket vlue tbles in vlution report provides the reder with visul mens of comprison. We will review severl illustrtions of vlution tbles tht the nlyst my include in the finl vlution report. In n ctul report, the nlyst would discuss these tbles, including listing of the ssumptions, written discussion of the results of ech of the tbles, nd detils on how they relte to the finl vlution. This nrrtive is not included in this chpter we concentrte on the presenttion of tbles. The reder is directed to the smple vlution reports found in Chpters 13 nd 14 in this text for nrrtive discussion relting to the vlution tbles. 123
124 The Mrket Approch to Vluing Businesses TWO DISTINCT ALTERNATIVES IN MARKET MULTIPLES As discussed in Chpter 1, there re two different types of vlution multiples: the equity-bsed nd the invested cpitl vlution multiples. When vluing the totl invested cpitl of firm, the nlyst considers the equity nd the interestbering debt of the subject compnies. When vluing the equity of firm, the nlyst considers only the common equity of the firm. Direct Vlution of Equity The direct vlution of equity is typiclly used by some pprisers when vluing minority interests: those interests tht do not hve the bility to chnge the cpitl structure of the compny. In this procedure, the nlyst uses mrket multiples of vrious levels of income vilble to equity owners. Some of these include Price/sles (generlly not preferred if there re senior securities becuse the sles re the result of the resources of the entire cpitl structure) Price/gross csh flow (gross csh flow = net income + noncsh chrges) Price/ernings before txes (EBT) Price/discretionry ernings (discretionry ernings = net income + txes + interest + noncsh chrges + compenstion to one owner mnger) Price/dividends or withdrwls Price/book vlue of equity (most often tngible book vlue, but my be totl book vlue) Price/djusted book vlue (sometimes referred to s price/net sset vlue) Vluing Totl Invested Cpitl Invested cpitl includes the totl vlue of ll components of the cpitl structure nd is defined s the sum of the mrket vlues of common nd preferred stock plus the mrket vlue of the interest-bering debt. The invested cpitl vlution procedure is sometimes preferred over the equity method for vluing controlling interests minly becuse of the bility of the controlling prty to directly impct the overll cpitl structure (debt versus equity) of the compny. Mny pprisers consider the invested cpitl procedure s the preferred wy to vlue ny compny. Subtrcting the debt from the results of the indicted mrket vlue of invested cpitl (MVIC) to get the indicted vlue of equity permits the ppriser to see the compny for wht it is without the debt creting blurring effect. In the invested cpitl procedure, the denomintor of the eqution used to compute the vlution multiples needs to include ll of the returns vilble to ll the invested cpitl. Usully this mens dding ll of the interest pid in ddition to ll the returns vilble to common equity. If there is preferred stock, the dividends
Compiling Useful Mrket Vlue Tbles 125 on the preferred stock must lso be included. Some of the more commonly used invested cpitl multiples re MVIC/sles MVIC/EBITDA (ernings before interest, txes, deprecition nd mortiztion) MVIC/EBIT (ernings before interest nd txes) MVIC/DFNI (debt-free net income bsed on n estimtion of wht net income would be if there were no interest-bering debt) MVIC/DFCF (debt-free csh flow bsed on n estimtion of wht gross csh flow [debt free net income + noncsh chrges] would be if there were no interestbering debt) MVIC/book vlue of invested cpitl (most often only tngible book vlue, lthough the nlyst might consider both tngible nd totl book vlue) MVIC/djusted book vlue of invested cpitl (where mjor ssets for subject nd guideline compnies re djusted to mrket vlues) The most widely used invested cpitl vlution multiple is the MVIC/ EBITDA multiple, becuse it elimintes the possible distortion in differing deprecition policies mong compnies. The second most frequently used invested cpitl multiple is the MVIC/EBIT multiple. For smller compnies where less complete dt my be vilble, MVIC/sles nd MVIC/discretionry ernings re often used. When invested cpitl multiples re used, the mrket vlue of the senior securities (debt nd preferred stock) must then be subtrcted from the indicted vlue of MVIC to rrive t the vlue of common equity. EXAMPLES OF MARKET VALUE TABLES The exmples include vrious vlution tbles tht n nlyst typiclly my include in the finl vlution report. ClerSkies is privtely held compny, which we will use to illustrte the direct vlution of equity nd totl invested cpitl methods. Exhibit 9.1 shows the blnce sheet of ClerSkies, nd Exhibit 9.2 shows the income sttement. Subject Compny to Guideline Publicly Trded Compnies Exhibit 9.3 includes line-by-line comprison of the income sttement nd blnce sheet for the subject compny nd the five publicly trded guideline compnies. Exhibit 9.4 shows the clcultions of mrket vlue of equity nd mrket vlue of invested cpitl for the five guideline public compnies selected. For illustrtive purposes, detiled clcultions for the equity vlution multiples of one of the public guideline compnies (Nimbus Corportion) re found in Exhibit 9.5 nd include
Exhibit 9.1 ClerSkies Corportion Blnce Sheet Exhibit 9.2 ClerSkies Corportion Income Sttement Note: The dt hve been condensed from vrious sources, including the sttement of csh flows, footnotes to finncil sttements, nd other sources: (1) long-term debt instruments ber n interest rte of 7%, (2) mrket vlue of the debt is pproximtely the sme s the book vlue of the debt, nd (3) effective tx rte equtes to 35%. 126
Exhibit 9.3 Comprtive Income Sttement nd Blnce Sheets (continued) 127
Exhibit 9.3 Comprtive Income Sttement nd Blnce Sheets (continued) Note: Figures represent yer-end 1999. 128
Exhibit 9.4 Guideline Compnies Mrket Vlue of Invested Cpitl Note: Long-term debt in Exhibit 9.3 ws used to crete this tble, ssuming tht mrket vlue of long-term debt pproximtes book vlue of long-term debt. None of these compnies hs issued preferred stock; if ny hd, we would include nother column showing the vlue of the preferred stock nd dd this vlue to the mrket vlue of invested cpitl column. Exhibit 9.5 Nimbus Corportion Equity Vlution Multiples Note: When vluing equity directly, these multiples often re presented on per-shre bsis.the multiple should be exctly the sme whether computed on per-shre or ggregte common equity bsis. Mrket vlue per shre from Exhibit 9.4. 129
130 The Mrket Approch to Vluing Businesses Price/sles Price/gross csh flow Price/ernings (net income fter txes) Price/book vlue Detiled clcultions for the invested cpitl vlution multiples of one of the public guideline compnies (Nimbus Corportion) re found in Exhibit 9.6 nd include MVIC/sles MVIC/EBITDA Exhibit 9.6 Nimbus Corportion Invested Cpitl Vlution Multiples Mrket vlue of invested cpitl from Exhibit 9.4.
Compiling Useful Mrket Vlue Tbles 131 MVIC/EBIT MVIC/book vlue of invested cpitl Exhibit 9.7 illustrtes the guideline compnies equity multiples. The top hlf of the exhibit includes four clculted equity multiples. Tke prticulr note of the vlues for the four clculted multiples for the Cumulus Compny. The mjority of the multiples re drsticlly different from those of the other four guideline compnies. The bottom hlf of Exhibit 9.7 communictes the summry sttisticl nlysis of the four invested cpitl vlution multiples nd includes the men, medin, rnge, stndrd devition, nd coefficient of vrition. The coefficient of vrition is defined s the stndrd devition divided by the men nd gives the nlyst n indiction s to the degree of dispersion exhibited by the dt points. The lower the coefficient of vrition, the lower the dispersion of the dt points, nd the better the vlution multiple is s n indictor of vlue. Note tht the equity/book vlue vlution multiple hs the lowest coefficient of vrition. The nlyst should note tht this result cn lso be eyeblled by noting the rnge of this multiple compred to the rnge of the other three multiples: The difference between the lowest equity/book vlue vlution multiple (1.50) nd the highest (6.50) is pproximtely fctor of 4. The equity/sles vlution multiple hs the next lowest coefficient of vrition with difference between its lowest vlue (0.18) nd highest vlue (1.72) of pproximtely fctor of 9. This clerly indictes tht the equity/book vlue vlution multiple exhibits less dispersion. Exhibit 9.8 illustrtes the guideline compny mrket vlue of invested cpitl multiples. Exhibit 9.7 Guideline Compny Equity Multiples Gross csh flow = net income + noncsh chrges. b Coefficient of vrition = stndrd devition / men.
132 The Mrket Approch to Vluing Businesses Exhibit 9.8 Guideline Compny Mrket Vlue of Invested Cpitl Multiples Assumes mrket vlue of debt = book vlue of debt. b Coefficient of vrition = stndrd devition / men. Exhibit 9.9 replictes Exhibit 9.7 except tht Exhibit 9.9 does not include Cumulus Compny. Bsed on Cumulus gret divergence from the other four compnies multiples, it hs been eliminted from our considertion nd the remining four hve previled. Similrly, Exhibit 9.10 replictes Exhibit 9.8 except tht Exhibit 9.10 lso does not include Cumulus. Exhibit 9.9 Guideline Compny Equity Multiples Less Cumulus Gross csh flow = net income + noncsh chrges. b Coefficient of vrition = stndrd devition / men.
Compiling Useful Mrket Vlue Tbles 133 Exhibit 9.10 Guideline Compny Mrket Vlue of Invested Cpitl Multiples Less Cumulus Assumes mrket vlue of debt = book vlue of debt. b Coefficient of vrition = stndrd devition / men. Subject Compny to Comprtive Trnsctions in Prtt s Stts Dt from the four dtbses of privtely held compny sles (Prtt s Stts, Done Dels, BIZCOMPS, nd the IBA Mrket Dt Bse) cn be consulted in the guideline merger nd cquisition method of business vlution when investigting ctul privtely held compny sle trnsctions in the mrket. Becuse the trnsctions used re usully controlling interests, it is most directly pplicble for vluing other controlling ownership interests, lthough it cn be used for minority interest vlutions with proper djustments. See Exhibit 9.11 nd Exhibit 9.12 s illustrtive exmples of vlution tbles using Prtt s Stts dt. Exhibit 9.11 represents the use of equity prices from the Prtt s Stts dtbse wheres Exhibit 9.12 depicts the use of del prices from the Prtt s Stts dtbse. The lowest coefficient of vrition occurs in the del price/ebitda vlution multiple in Exhibit 9.12. The implied vlue bsed on this vlution multiple is shown s well. In full vlution report, extensive discussion should revolve round the dt in these tbles. SUMMARY We hve presented vrious tbles tht n nlyst my wnt to use in finl vlution report. We reviewed the invested cpitl procedure nd the direct equity vlution procedure, nd creted smples of the different types of vlution tbles.
Exhibit 9.11 Automobile Deler Equity Price Vlution Multiples from Prtt s Stts Note: Dt re bsed on 29 selected guideline compnies from Prtt s Stts. Used with permission. Not meningful. b Coefficient of vrition = stndrd devition / men. c Multipliction fctor represents vlue by which the vlution multiple s medin vlue is multiplied (e.g., multipliction fctor for equity price / sles is sles = $55,857,000; this vlue multiplied by 0.18 equtes to the implied vlue). 134
Exhibit 9.12 Automobile Deler Price Vlution Multiples from Prtt s Stts Note: Dt re bsed on 29 selected guideline compnies from Prtt s Stts. Used with permission. Del price in Prtt s Stts equtes to mrket vlue of invested cpitl. b Coefficient of vrition = stndrd devition / men. c Multipliction fctor represents vlue by which the vlution multiple s medin vlue is multiplied (e.g., multipliction fctor for del price / sles is sles = $55,857,000; this vlue multiplied by 0.18 equtes to the implied vlue). 135
136 The Mrket Approch to Vluing Businesses We reviewed dt bsed on the guideline compny method (ClerSkies exmple) nd the merger nd cquisition method (uto deler from Prtt s Stts ). It is importnt to remind the reder tht in finl vlution report, n effective discussion of the informtion compiled from the tbles is required. We hve concentrted on the cretion of effective tbles in this chpter the nlyst will use his or her knowledge nd the informtion locted throughout this book to crete n effective discussion of the relevnt mtters for ny vlution.