My boss approached me yesterday about potentially doing some private company valuation/modeling for our clients. For some of our clients we serve in an advisory capacity and consult with them on how to structure their company in order to maximize its transferable value with the eventual goal of selling it to PE/outside company, or company insiders/management via an ESOP or whatever the funding vehicle may be. But, I work on the other side of our shop as an “investment analyst” and serve our investment consulting and PWM groups. Investment consulting, a euphemism for scanning, reporting, and benchmarking managers to one another for 401ks & Pensions, is what I spend about 50% of my time doing. When we need to replace an SMA/fund it falls onto me to perform the analysis/due dilligence, cc’s, and sometimes site visits before the manager is recommended to the client. I can only take so many Alpha and Sharpe statistics in one day, let alone fend off all of the fund wholesalers. This doesn’t exactly get me jumping out of the bed every morning. Some of my other time is spent designing portfolios and building the investment lineups used for our PWM clients. We mostly use mutual funds to accomplish this unless the the client has $2MM+ in assets. It is very rare that I actually get to recommend individual securities to clients unless their muni bonds or CDs (boring). While I don’t see much of anything leading to a potential career in ER at my current firm the thought of doing private company valuation struck me as interesting. One of the goals of this would be to have someone, me, be able to speak fluently with the ibankers and pe firms when it comes time to shop the client’s company to market. What should I be doing in order to progress down the valuation path? I have an unlimited number of company financial statements and valuation reports at my disposal. Any good websites, books, or resources where I can hone my skills? Thanks
Get Valuing a Business by Shannon Pratt. It’s the bible. It starts at the begining and walks you through everything you need to know. http://www.amazon.com/s/ref=nb_ss_2_18?url=search-alias%3Daps&field-keywords=valuing+a+business+pratt&sprefix=valuing+a+business
The current CFA L2 curriculum has a reading on private company valuation. I also agree with the previous poster about Shannon Pratt’s book. He is basically the godfather of private company valuation. I would also recommend articles from Aswath Domodoran. He is a frequent contributor to the business valuation field.
Check out www.bvresources.com. It is basically a one-stop shop for all things business valuation related.
Shannano Pratt pertains to court valuations in marital/tax disputes. If this is for real investing PE valuation, don’t use Pratt. He will tell you things like: -Apply Mergerstat control premium -Add discount for lack of marketability In real PE valuation, there are no blanket rules.
I do this as a job. It is actually fairly boring.
RealWarriorsOnlyPlease Wrote: ------------------------------------------------------- > Shannano Pratt pertains to court valuations in > marital/tax disputes. If this is for real > investing PE valuation, don’t use Pratt. He will > tell you things like: > -Apply Mergerstat control premium > -Add discount for lack of marketability > > In real PE valuation, there are no blanket rules. adding a lack of marketability discount/adjusting your multiples or cash flows for embedded control or synergy premiums is not a blanket rule. it is a reasonable thing to consider, whether you are doing a valuation for investing or divorce dispute. a blanket rule would be, “all private investments need to be adjusted down by 30% marketability discount”
blanket rule is this for valuation equity interest that does distribute and low debt 19% equity that distributes and has moderate to high debt 23% equity that distributes 33% those are blanket discounts
there are better ways to quantify these discounts than rules of thumb. but ignoring them altogether is just as wrong as using blanket discounts
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There is a large amount of capital market evidence to quantify a lack of marketability discount for a privately held business or business interest. Similarly, there is capital market evidence related to lack of control or minority interest to quantify the discount. The trick in valuation is comparing the subject business interest to the capital market evidence in order to come up with an appropriate discount. If you are using a cookbook approach (i.e Detroiter’s post) to apply discounts than you are not really doing the profession justice IMO. Any analyst can apply blanket discounts. The best valuation analysts IMO, discuss and attempt to properly quantify these discounts.
I agree with all that, but I was just stating blanket vlauations you can use. Also extends to illiquid side pocket assets, we have found recently that those were around 60% discount after we finally sold some off (warrants, convertibles, RSTD, etc.)
My point was that you should think about each valuation individually. Obviously, all else equal, you would rather have control than not, or have liquidity than not. However, if you have less than 50% ownership but are the largest shareholder, that changes things. If you have a 3% stake, but have an ex-colleague at another firm who has 97% and you have a solid relationship, you get their benefits of control. For illiquidity, if you own just one asset, say a power plant with PPAs over the useful life, a DLOM makes much less sense. I reality, the value of control and PE investing lies in the denominator of the multiple, not the numerator.