valuation 2010 final
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VALUATION AND FORECASTING
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Before we start… 3
Financial Fundamentals Learning the income statement, balance sheet etc
18
Exit Analysis – Nordic VCs Decreasing valuations 8
Financial Performance Key ratios and actual performance vs. plans
27
ValuationRelative and absolute methods. DCF is an absolute method that discounts future cash flows
48
Financial Planning Combine top-down and bottom-up approach and ensure link between plan and budget
34
The VC Method He value of a company is a matter of discussion over a cup of coffee
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3BEFORE WE START…
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.. I need three volunteers?
BEFORE WE START…
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Tweet key learnings…
BEFORE WE START…
Control10Password:
MCF10
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Give a hand to the tweeters!
BEFORE WE START…
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Reminder - Assignment for every study group! Deadline - the lecture on Options Every study-group should find 10 tweets that:
You find interesting / funny That can serve as a either a summary of the
lectures or that explores an important topic Upload the Powerpoints at Slideshare and tweet
the link in Twitter in MCF10 account Two groups will present – randomly chosen
BEFORE WE START
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8EXIT ANALYSIS – NORDIC VCS
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Trade sales are most common and the crises has reduced # exits and closed IPO window
EXIT ANALYSIS – NORDIC VCS
Source: VentureXpert
0
100
200
300
400
500
600
2000 2001 2002 2003 2004 2005 2006 2007 2008
An
tal exit
s
Børsnoteringer Industrielle salg
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As well as having reduced the values – IPOs are typically larger than trade sales
EXIT ANALYSIS – NORDIC VCS
Source: VentureXpert
0
500
1.000
1.500
2.000
2.500
3.000
3.500
2000 2001 2002 2003 2004 2005 2006 2007 2008
Mio
. kr.
Børsnoteringer Industrielle salg
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Decreasing exit value and increased general risk leads to lower valuation for early-stage
EXIT ANALYSIS – NORDIC VCS
Source: VentureXpert
0
100
200
300
400
500
600
700
800
900
1.000
2000 2001 2002 2003 2004 2005 2006 2007 2008
Media
n a
f valu
ations
(mio
. kr.
)
Seed & start-up Early-stage Ekspansion Later stage
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Know your value inflection points...
EXIT ANALYSIS – NORDIC VCS
Pre-venture Venture
Capital Need
Exit Value
Proof-of-concept
Proof-of-business
Proof-of-scale
Market Share
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Have the end in mind…
EXIT ANALYSIS – NORDIC VCS
Start-up Strategic Customer
Competitor
New entrant
Strategic Supplier
IPO
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Approach the exit differently
EXIT ANALYSIS – NORDIC VCS
Trade Sale
Business strategy to fit exit
Identify buyers
Position the
company
Create bid wars
IPO
Business strategy to fit exit
Asses timing – capital
need and market
Prepare organisation setup
Create exposure
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US exits have higher values – for several reasons
EXIT ANALYSIS – NORDIC VCS
Source: Vækstfonden
0
200
400
600
800
1000
1200
1400
1600
USA Norden Øvrige Europa
Mio
. kr.
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US VCs participate in the most attractive exits of Nordic companies
EXIT ANALYSIS – NORDIC VCS
Vækstfonden
0
500
1.000
1.500
2.000
2.500
3.000
3.500
4.000
4.500
5.000
USA Andet land Alle
Mio
. kr.
Med US VC Uden US VC
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Why do you think that the exit values are higher for the Nordic companies who has a US VC investor on board?
EXIT ANALYSIS – NORDIC VCS
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18FINANCIAL FUNDAMENTALS
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Standard P&L (Income Statement)
FINANCIAL FUNDAMENTALS
Standard Functional P&L AKA
Net Sales 100 Revenue or Turnover
- Cost of Goods Sold 50 COGS, Variable Cost, OPEX
= Gross Earnings 50 Gross Profit
- Marketing Expenses 10 Fixed Cost, OPEX
- Administrative Expenses 10 Ibid.
- Building Rental 10 Ibid.
= Earnings before Interest, Taxes, Depreciation and Appreciation 20 EBITDA
- Depreciation expenses 5
+ Appreciation 3
= Earnings before Interest and Taxes 18 EBIT or Operating Income
- Interest 5 Financial expenses
= Earnings before Taxes 13
- Taxes (@ 25% tax) 3,25
= Net Income 9,75 Net Profit
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Bill of Material – a nice reality check
FINANCIAL FUNDAMENTALS
Bill of Material - Relevant for COGS
Components Unit Total units Total Costs
Electronic 40 1.200 48.000
Plastic 5 1.200 6.000
Connectors 5 1.200 6.000
Direct labor 15 1.200 18.000
Total 65 1.200 78.000
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The Balance Sheet - Assets
FINANCIAL FUNDAMENTALS
The Balance Sheet - Assets AKA
Cash and Marketable Securities 100
Recievables 50 Debtors
Inventories 50 work-in progress, raw mat.
Total Current Assets 200 Short term assets
Equipment 500
Less: Accumelated Appreciation and Depreciation 10 SUM: Reduction of increas in value
Net Equipment 490
Building 400
Other Long Term Assets 20 E.g. IPR or Goodwill
Long Term Assets 910 Fixed Assets (+1 Year)
Total Assets 1110
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The Balance Sheet – Liabilities and Equity
FINANCIAL FUNDAMENTALS
The Balance Sheet - Liabilities and Equity AKA
Payables 100 Debt to suppliers
Accrued wages 50 Debt to employees
Bank Loans 50
Other Current Liabilities 10 Cathall short term debt
Total Current Liabilities 210 Short Term Debt (<1 year)
Long term liabilities 500
Capital Leases 10 Stein Bagger issue
Total long-term liabilities 510 (>1 Year)
Owner's equity 390Residual (capital stock, trans. Income)
Total Liabilities and Equity 1110
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Cash Flow Statement
FINANCIAL FUNDAMENTALS
Cash Flow Statement AKA / ExplanationNet Income 9,75 +Depreciation 10 Non-cash out-flaw (an adjustment)∆ Working Capital: -Increase in Recievables 10 You fund customers-Increase in Inventories 5 +Increase in payables 2 taking trade credit reduces capital need+Increase in accrued wages 3 borrowing from employeesNet cash flow from operations 9,75 Cash flow from investing activities (CAPEX) - Investments In long-term assets 80
Free Cash Flow -70,25 Cash Generating (>0) / Cash Burning (<0) Cash Flow from financing activities + Increase in short term liabilities (bank credit) 1 Short term bank financing+ Increase in long-term debt 0 Long-term bank financing+ Increase of Equity 10 Investor putting money in the companyNet Change in Cash -59,25 Beginning Cash and marketable securities 100 Ending Cash and Marketable securities 40,75 < 0 and you are dying
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Operational Breakeven
FINANCIAL FUNDAMENTALS
EBDATEBDAT = Earnings before Depriciation, amortization and taxes
EBDAT Breakeven = Amount of revenues to cover cash OPERATING expenses
Breakeven: EBDAT = 0
NOPATEVA = Net Operating Profit After Taxes (NOPAT) – After-Tax Dollar Cost of Financial Capital Used
Seperates a firm’s operating from its financing
NOPAT = EBIT-Tax
NOPAT Breakeven revenues (NR) = TOFC/(1-VCRR)
TOFC = Total Operating Fixed Cost
VCRR = Ratio of Variable cost to revenue
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Real Break Even
FINANCIAL FUNDAMENTALS
Real Breakeven
When there exist Positive Free Cash Flow
FCF = Net Income + (Depriciation/Armortization) - ∆ Working Capital-CAPEX Cash Burn = OPEX + Interest+ Tax + Increase Inventory- ∆ payables and accrued liabilities + CAPEX
Cash Build = Net Sales – Increase in Recievables
Net Cash Burn = Cash Burn – Cash Build
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As an entrepreneur you must know
Burn Rate: Avg. monthly cash burn
Runway: Remaining liquidity / Burn Rate
FINANCIAL FUNDAMENTALS
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27FINANCIAL PERFORMANCE
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Ratios – using common sense and industry benchmarks
FINANCIAL PERFORMANCE
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The use of ratios relates to life cycle
FINANCIAL PERFORMANCE
Seed Financing
Startup Financing
A-round
B,C-round
Public & Seasoned
Maturity
RapidGrowth
Survival
Startup
Focus on cash & cost
Broad Focus on ratios
Focus on cash & profitability
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I look at traction in Sales
FINANCIAL PERFORMANCE
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and traction in healthy operations
FINANCIAL PERFORMANCE
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… as well as CASH
FINANCIAL PERFORMANCE
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Critical Success Factors
FINANCIAL PERFORMANCE
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34FINANCIAL PLANNING
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The progress for successful venture
FINANCIAL PLANNING
Pre-venture Venture
Capital Need
Exit Value
Proof-of-concept
Proof-of-business
Proof-of-scale
Market Share
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and the cash balance
FINANCIAL PLANNING
High
Cash Balance
Low
Founder and FFF
Seed National Venture
Int. Venture Exit
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Time fundraising with value inflection points and before cash balance is too low
Pre-venture Venture
Capital Need
Exit Value
Proof-of-concept
Proof-of-business
Proof-of-scale
Market Share
High
Cash Balance
Low
Founder and FFF
Seed National Venture
Int. Venture
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Tools for financial planning in a growth company
FINANCIAL PLANNING
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Key Problem – Missing link between business plan and financial plan
FINANCIAL PLANNING
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If my company is expecting to have this much revenue – then what is my plan to get there?
FINANCIAL PLANNING
If my plan is this – then what is the likely revenue, cost and capital requirement
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How to work with a business plan / budget /anything in life…
FINANCIAL PLANNING
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Top Down – starting with the potential
FINANCIAL PLANNING
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Buttom Up – Building it up from today
FINANCIAL PLANNING
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44FINANCIAL PLANNING
...clarify to yourself and potential investors what the assumptions for the budget are in relation to revenue drivers, cost drivers, investments etc.
It is always better to make informed and reasonable assumptions than claiming it is difficult to predict the future
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Think contingent scenarios
FINANCIAL PLANNING
• Best case• Base line• Worst Case
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46FINANCIAL PLANNING
As well as using WHAT IF? Scenarios on important paramerters – Revenue, Price, COGS, Funding...
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Forecasting will become easier with maturity and lower risk
FINANCIAL PLANNING
Seed Financing
Startup Financing
A-round
B,C-round
Public & Seasoned
Maturity
RapidGrowth
Survival
Startup
Low HighModerate
Sales Forecasting Accuracy
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48VALUATION
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Four steps of valuation
VALUATION
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50FINANCIAL PLANNING
This makes valuation more ART than SCIENCE
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Two valuation types
VALUATION
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52VALUATION
Relative Valuation
• Price / Earnings (P/E)
• Price / Sales (P/S)
• Price / Book (P/B)
• EV / EBIT
• EV / NOPAT
Absolute Valuation
• Discounted Cash Flow (DCF)
• Economic Value Added (EVA)
• Maximum Dividen Method
• Options
The relative and absolute methods
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Evaluating a company or a project
VALUATION
Company
• Price / Earnings (P/E)
• Discounted Cash Flow (DCF)
Project
• Payback
• Net Present Value (NPV)
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In absolute valuation
VALUATION
Value is to generate positive cash flows to the owner…
...and to calculate the present value of those cash flow (DCF and NPC)
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The principle of NPV
VALUATION
Identify future cash flows
Bring cash-flows to present value with discount rate that reflects the risk of cash flows
NPV 0 Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
-$60.00
-$10.00
$40.00
$90.00
$140.00
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The DCF valuation for firms (EV)
VALUATION
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Generic DCF valuation
VALUATION
Aswath Damodaran
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But which cash flows
VALUATION
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Calculating the Free Cash Flow
VALUATION
Free Cash Flow to Equity (FCFE) = Net Income
- Net Capital Expenditure
- ∆ in Net Working Capital
+ New Debt
- Debt RepaymentFree Cash Flow to Firm (FCFF) = EBIT*(1-tax)Unlevered cash flow - CAPEX
- Depreciation
- ∆Working Capital or
Free Cash Flow to Firm (FCFF) = FCFE + Interest Expenditure(1-t)
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Valuing a firm – the discount factor
VALUATION
WACC = Weighted Average Cost of Capital
WACC = Cost of Equity * Equity ratio + Cost of Debt * Debt Ratio
30Y State Bond
4,5%
Measure for how closely
a stock follows the
market
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Valuing firms – Terminal value (two approaches)
VALUATION
Terminal Value = FCFF n * (1+g) / (r-g)Perpetuity Growth method
FCFF = Free Cash Flow to the Firmn = periodsr = WACCg = perpetual growth rate (often 1-3%)
Multiple Terminal Value = EBITDA * Peer MultipleExit multiple Method
(1+WACC)n
FCFF = Free Cash Flow to the FirmPeer Multiple = Enterprise Value (EV) / EBITDA for comparable companyn= Periods
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62THE VC METHOD
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The VC Method = The Exit Multiple Method
THE VC METHOD
Multiple Terminal Value = EBITDA * Peer MultipleExit multiple Method
(1+WACC)n
FCFF = Free Cash Flow to the FirmPeer Multiple = Market Cap / EBITDA or Price / Sales for comparable companiesn= Periods
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We consider
THE VC METHOD
….. IRR, Return Multiple, Absolute Return, Ownership under the different deal terms...
… the case from an overall perspective (team, industry, technology, etc)...
However most often the price of a company comes down to negotiation over a cup of coffee
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Financial Fundamentals Learning the income statement, balance sheet etc
18
Exit Analysis – Nordic VCs Decreasing valuations 8
Financial Performance Key ratios and actual performance vs. plans
27
ValuationRelative and absolute methods. DCF is an absolute method that discounts future cash flows
48
Financial Planning Combine top-down and bottom-up approach and ensure link between plan and budget
34
The VC Method He value of a company is a matter of discussion over a cup of coffee
62
The Summary