How to Estimate Private Company Value And Rate a Prospect With The Information David Lamb Consultant, Target Analytics May 2, 2008

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 Closely Held Stock

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 measure progress 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

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

Target Company Iconic bookstore with three locations in the Denver 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

Ways to measure value 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

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

Comparison to public 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 searchSEC.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: 5261 becomes 5200 Once you know the company name, look it up on your favorite public company site (e.g. finance.yahoo.com) finance.yahoo.com

Comparison considerations Market Capitalization is one good measure of public company value 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 market cap 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

Comparison to other private co.s 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 –$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 GuideUltimate Valuation Guide

Inc.’s 2008 Valuation Guide Premium Zone Discount Zone Median Sale Price Median Annual Sales

Inc.’s 2008 Valuation Guide Median Sale Price Median Annual Sales

Inc.’s 2007 Valuation Tables

BizStats Rules of Thumb

Business Classifieds Bizbuysell.com GlobalBX.com

Pulling it all together Company sales are reported to be $20 million The one classified found for a bookstore supports a high ratio of value to sales Public company in the same industry has a salesto value ratio of 35% 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 company in the same industry has a salesto value ratio of 35% 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

Alternate Calculations Using similar public company comparison (35% of sales) $7 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

Rating the prospect Households with a net worth of $1M-$10M, 2001 IRS data, published in 2006

Rating the prospect Assume 50% ownership for the prospect who founded the company more than 30 years ago Ownership stake would be between $5.25 MM (BizStats) and $4.3 MM (Inc. Guide) – conservatively could be $4MM Per IRS, closely held stock is 8% of net worth – make it 1/10 for easy calculation 10 x $4 MM = $40 MM estimated net worth Prospect’s philanthropic capacity could be 2-5% of estimated net worth 2% x $40 MM = $800,000 5% x $40 MM = $2 MM

Consolidated resource list 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 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

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