Chapter 7 - Private Company Valuation

Excess Earnings Method

Example for Slides 13-15
ASSUMPTIONS
Working capital
Fixed assets
Normalized earnings
Required return for working capital
Required return for fixed assets
Growth rate of residual income
Discount rate for intangible assets
OUTPUT - Firm Value
WC required income
FA required income

$400,000
$1,600,000
$225,000
5%
12%
3%
18%

$
$

Residual income

20,000
192,000
$13,000

Value of intangibles

89,267

Firm value

2,089,267

Chapter 7 - Private Company Valuation

Developing Discount Rates for Private Firms - 3 Required Rate of Return Models
Example for Slides 17-19
ASSUMPTIONS
Risk-free rate
Equity risk premium
Beta
Small stock premium
Company-specific risk premium
Industry risk premium

1.00%
6.00%
1.5
4.00%
1.50%
1.20%

OUTPUT
CAPM expected return
Expanded CAPM expected return
Build-Up expected return

10.00%
15.50%
13.70%

red Rate of Return Models

no industry RP here
no beta but industry RP here

Chapter 7 - Private Company Valuation

Valuing a Private Firm Using the Guideline Public Company Method
Example for Slides 24-27
ASSUMPTIONS
Market value of debt
Normalized EBITDA
Average MVIC/EBITDA multiple
Control premium from past transactions
Discount for increased risk

$6,800,000
$28,000,000
9.0
20%
18%

Strategic?

yes

Multiple adjusted for risk

Multiple adjusted for control

7.4
8.9

OUTPUT

Firm value

$ 249,200,000

Value of equity

$ 242,400,000

$6,800,000
$28,000,000
9.0
20%
18%
no

7.4
7.4
$ 207,200,000
$ 200,400,000

Change these inputs in Column B to arrive at outp

Indicate "yes" or "no" in Column B or C as to whet
is strategic, i.e., a control premium will increase t
in the case of a strategic buyer.

B to arrive at outputs below.

B or C as to whether buyer
um will increase the valuation

Chapter 7 - Private Company Valuation

Calculating the Valuation Discount Using DLOC
Example for Slide 30
ASSUMPTIONS
Control premium

19%

OUTPUT
DLOC

16.0%

Chapter 7 - Private Company Valuation

Calculating the Total Valuation Discount Using the DLOC and the DLOM
Example for Slide 32
ASSUMPTIONS
DLOC
DLOM

20%
16%

Output
Total valuation discount

32.8%