David Lamb Consultant, Target Analytics

 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

 Reasons to value a private company:  To measure progress  To sell it  To raise capital from investors  For a management buyout  For estate planning  For an employee stock ownership plan  For taxation  The value of a company is influenced by the reason you’re asking the question  Change the purpose of the valuation and you change the stock price  Only fundraisers ask how it affects a gift

 Fair market value is what a willing buyer will pay a willing seller when neither is under pressure  Information typically is not available on private companies  To find out what a company is worth, sell it  Sometimes D&B provides a net worth figure  Read everything you can about your target company – it’s not just numbers

 Value depends on 3 factors  How much cash it generates today  Expected growth in cash in the foreseeable future  The return buyers require for their investment  Companies with a negative cash flow can have a high value  Companies with a positive cash flow might have a modest value  Current interest rates influence value  Inverse relationship between interest trend and value trend – similar to bond markets  Investors compare return on other investments to return on investment in the private company

 Iconic bookstore with three locations in a major metropolitan area  Annual sales are about $20 million per IAC Company Intelligence  Incorporated in 1973  Report lists 5 named officers  Prospect is the CEO and founder  No % of ownership is reported

 Book value  Price/earnings ratio (P/E)  Discounted cash flow  Comparison to similar companies of known value  Multiple: Known value/known annual sales  Apply the multiple to target company’s sales

 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

 Yahoo Stock Screener (  Parameters that can be used  Industry (SIC or NAICS)  Sales  Enter relevant info for the target company  SEC.gov company search allows SIC search SEC.gov  If you don’t know the SIC, check  If your search turns up no companies, try replacing the right-hand numbers with zero’s: 5943 becomes 5940 or 5900  Once you know the company name, look it up on your favorite public company site (e.g. finance.yahoo.com)finance.yahoo.com

 Market Capitalization is one good measure of public company value  Enterprise Value, if offered, can be better - incorporates debt and cash into the equation  Your target company value is probably considerably less, even if otherwise equivalent  Public companies tend to be much larger than their private counterparts  Ratio of annual sales to value provides a “multiple” for the relevant industry  The more examples the better  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

 Business Valuation Resources (  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  $625  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  $425  INC. Magazine’s Ultimate Valuation GuideUltimate Valuation Guide

Premium Zone Discount Zone Median Sale Price Median Annual Sales

Median Sale Price Median Annual Sales

 Bizbuysell.com Bizbuysell.com  GlobalBX.com

 Company sales are reported to be $20 million  The one classified found for a bookstore supports a high ratio of value to sales  Public companies in the same industry have a sales to value ratio ranging from  Inventory is unknown, but classified add suggests a possible inventory to sales ratio of 37.5%  Best guess of inventory: 37.5% x $20 MM = $7.5 MM  Company sales are reported to be $20 million  The one classified found for a bookstore supports a high ratio of value to sales  Public companies in the same industry have a sales to value ratio ranging from  Inventory is unknown, but classified add suggests a possible inventory to sales ratio of 37.5%  Best guess of inventory: 37.5% x $20 MM = $7.5 MM

 Using similar public company comparison (middle valuation is 22% of sales)  $4.4 MM  Using Inc. Valuation Guide for retail trade (43% of sales)  $8.6 MM  Using BizStats (15% of sales + inventory)  $7.5 MM Inventory  $3.0 MM 15% of sales  $10.5 MM Total

Households with a net worth of $1.5M-$10M, 2004 IRS data, published in 2008 [2] Includes cash and cash management accounts. [3] Includes all government bonds, bonds issued by corporations and foreign governments, mortgages and notes, cash value life insurance, and diversified mutual funds. [4] Includes Individual Retirement Accounts, annuities, and self-employed or Keogh plans. [5] Includes non-corporate businesses, farms, and limited partnerships.

 Assume 50% ownership for the prospect who founded the company more than 30 years ago  Alternative valuations:  Ownership stake would be between $5.25 MM (BizStats)  $4.3 MM (Inc. Guide)  $2.2 MM (Comparable public companies)  Comparable company for sale supports high ratio  Reasonably conservative guess could be $2MM  Per IRS, closely held stock is 9% of net worth – make it 1/10 for easy calculation  10 x $2 MM = $20 MM estimated net worth  Prospect’s philanthropic capacity could be 2-5% of estimated net worth  2% x $40 MM = $400,000  5% x $40 MM = $1 MM

 Yahoo! Stock Screener: screen.yahoo.com/stocks.htmlscreen.yahoo.com/stocks.html  BV Resources:  Inc. Valuation Guide:  BizStats:  BizBuySell: bizbuysell.combizbuysell.com  GlobalBX:   White Paper papers.aspxwww.blackbaud.com/resources/white- papers.aspx  Yahoo! Stock Screener: screen.yahoo.com/stocks.htmlscreen.yahoo.com/stocks.html  BV Resources:  Inc. Valuation Guide:  BizStats:  BizBuySell: bizbuysell.combizbuysell.com  GlobalBX:   White Paper papers.aspxwww.blackbaud.com/resources/white- papers.aspx