Business Valuation for Start ups & Young Growth Companies
Presented by
CA Viswanathan , FCA ,ACS, Registered Valuer (Securities and Financial Assets)
Contact : + 91 99622 60333 Website : www.virtualauditor.in
Please Remember . .(Disclaimer)
This is not legal advice—only a discussion on types of valuation and its what drives the valuation
What is Valuation?
Valuation an estimation of the worth of something be
it an Asset (Land ,Machinery) , Value of Business
( used for start up valuation), especially one carried out by a professional valuers. 2. Companies, like human beings, have a life cycle and a firm’s
valuation should be able to reflect its position in the lifecycle , first step being Company registration and getting all taxation registration i.e GST Registration
Business Valuation
Imagine you've put Rs100,000 into starting a new business, and you've been growing it for the last year. You think you have a viable product, and initial customer tests back up your claim. You're ready for venture capital funding.
How much is your company worth right now? How much is your equity worth?
For Online Business Valuation contact Virtual Auditor @ 9962260333
Lets Find out
Business Valuation contd. Your Accountant will tell you will tell you that your company is worth the value of its assets, based on the initial cost of their acquisition, plus you cash on hand But is that really the value? If you were to sell the company, you'd be selling it as a company, with a future and a customer base and an idea that has value.
Startup Valuation more so referred as Company valuation has to done only be Registered valuers
The End Game
The Midlife Crisis
The Scaling up Test
The Bar Mitzvah
From idea to business
The Lightbulb (Idea) Moment
$ Revenues/ Earnings
Corporate Life Cycle
Revenues
Earnings (Profits) Time
Growth stage
Description
Stage 1 Start-up
Stage 2 Young Growth
Stage 3: High Growth
Stage 4 Stage 5 Mature Growth Mature Stable
Stage 6 Decline
Have an idea for a business that meets an unmet need in the market.
Create a business model that converts ideas into potential revenues & earnings
Build the business, converting potential into revenues.
Grow your business, shifting from losses to profits
Scale down your business as market shrinks.
Defend your business from new competitors & find new markets
Pivot and adopt new Technology : Rogers Technology Adoption Curve
7 STEP BUSINESS FINANCE FRAME WORK
FINANCAL DRIVERS Identify How much can you can Invest in early stages
Business Valuation approaches
Pure Negotiation Approach lets assume your fund requirement is Rs 1.35Mn, this are decision that you need to take with equity dilution
Pure Negotiation Approach Lets assume that you are willing to give 25% equity of your company , the value of the Company will be Rs. 5.4 Mn
DISCOUNTED FREE CASH FLOW METHOD
METHOD
Pre Money and Post Money Valuation Pre Money Valuation: Pre-money valuation is equal to the price paid per share in the financing round multiplied by the number of shares outstanding before the financing event
Pre Money and Post Money Valuation Post money Valuation Definition: In A Private Company Valuation , Pre-money valuation is equal to the price paid per share in the financing round multiplied by the number of shares outstanding after the financing event
Understanding Pre & Post Money Valuation
Post Money Valuation = Value of the Company Before the Investment (Pre money)+ Amount of Investment
Offer
Investor 1
Investor 2
Rs 25000 for 20% of business
Rs 1,00,000 for 50% of Business
Post Money Valuation Rs 25000/20% = 125000
Rs 100000/50% = 200000
Pre Money Valuation
Rs 200000- Rs 100000 = Rs 100000
Rs 125000 - Rs 25000 = Rs 10000
Estimating your firm’s FCFF (Free Cash flow to Firm)
Estimating your Free Cash flow to firm
Step 1: Estimate EBIT (Earnings Before Interest & Taxes) * (1-t)
Step 2: Add : Depreciation Step 3: Add: Capital Expenditures Step 4: Add : Non Cash Changes in Working Capital Total of all the above will give your FCFF
ESTIMATING COST OF EQUITY You have started you company with intention of retunes on you capital that you have employed , bank FD has 5% Return where as return on you business will be 25% to 30 % who is this calculated ?
Cost of equity = Rf (Risk free rate of return ) + Beta × (market rate of return – risk free rate of return) Beta is the risk factor
The above rate shall for discounting the future cash flows , assuming the company has no debt
Estimating the Risk 1. Risk, in traditional terms, is viewed as a ‘negative’. Webster’s dictionary, for instance, defines risk as “exposing to danger or hazard”. The Chinese symbols for risk, reproduced below, give a much better description of risk
The first symbol is the symbol for “danger”, while the second is the symbol for “opportunity”, making risk a mix of danger and opportunity Source : Aswath Damodaran
Estimating Terminal Value Terminal Value the value of the firm in perpetuity ( or the exit/sale date) It assess the cash flow of the company till the life time of the company Its given by the formula mentioned below
Estimating Terminal Value Terminal Value the value of the firm in perpetuity ( or the exit/sale date) It assess the cash flow of the company till the life time of the company Its given by the formula mentioned below
Sample Discounted Cash Flow 21.0%
Cost of Capital
2.0%
Growth
1.0
Rs in thousands
Actual
2.0
FY19 FY20 Forecast Forecast
3.0
FY21 Forecast
4.0
FY22 Forecast
5.0
FY23 Forecast
Free Cash flow
935
484
1,045
1,554
1,810
Discount factor
0.83
0.68
0.56
0.47
0.39
Present value of UFCF
773
331
590
725
698
DCF Valuation PV of Cash flows
3,116.6
Continuing value
9,718.7
PV of Continuing value
3,747.0
Enterprise value
6,863.6
() Financial liabilities
(208.7)
Cash
8.0
Equity value
6,662.8
Note
Total Estimated Future Revenue Amount in Crore
FY 3/20
FY 3/21
FY 3/22
FY 3/23
FY 3/24
Central rights income Sponsorship income (1) Gate collection income Franchise income from Sponsors Revenue from merchandising (2) Total Revenue
352.3 85.4 27.4 39.6
352.3 93.9 35.0 39.6
352.3 103.3 42.0 39.6
352.3 113.7 50.4 39.6
352.3 125.0 60.5 39.6
1.0
1.2
1.4
1.7
2.1
505.7
522.0
538.6
557.6
579.4
Total Estimated Future Expenses FY3/20
FY3/21
FY3/22
FY3/23
FY3/24
Cost ofmaterials
0.5
0.5
0.6
0.8
0.9
EmployeeBenefits
1.1
1.2
1.4
1.5
1.6
Players Fees
71.8
75.4
79.2
83.1
87.3
Support Staff fees
11.3
12.4
13.6
15.0
16.5
Players Expenses
0.4
0.5
0.5
0.6
0.6
Amount in Crore
Franchisee Fees
0.1
0.1
0.1
0.1
0.1
Sales PromotionExpenses
1.3
1.5
1.6
1.8
2.0
Canvassing Commission
1.3
1.5
1.6
1.8
1.9
Rentexpenses
2.3
2.4
2.5
2.6
2.8
Insurance
0.1
0.1
0.2
0.2
0.2
Rates andtaxes
0.2
0.3
0.3
0.3
0.3
Support Staff Expenses
0.2
0.3
0.3
0.3
0.3
Telephone postage
0.0
0.0
0.1
0.1
0.1
Consultancy fee
0.2
0.2
0.3
0.3
0.3
Printing stationery
0.0
0.0
0.0
0.0
0.0
Repairs &Maintenance
0.0
0.0
0.0
0.0
0.0
Office Maintenance
1.1
1.2
1.4
1.5
1.7
Travelling exp
2.7
2.9
3.2
3.6
3.9
Compliments
9.0
9.9
10.9
12.0
13.2
Legal professional charges
0.3
0.3
0.3
0.3
0.3
TournamentExpenditure
7.5
8.3
9.1
10.0
11.0
Bank charges
0.0
0.0
0.1
0.1
0.1
Vehicle HireCharges
0.0
0.0
0.0
0.0
0.0
Payment for audit services
0.0
0.0
0.0
0.0
0.0
Miscellaneous Expenses
8.6
9.5
10.4
11.5
12.6
120.2
128.6
137.5
147.3
157.8
Total
Notes 1. Cost of Materials assumed to be 43% of the revenue from merchandising 2. All other expenses is assumed to grow at certain cost inflation by case to case
Estimated Income Statement/Profit & Loss Account Amount in Crore Earnings bef Interest & Tax (EBIT) Finance Cost (8% on Rs 65 crore) Earnings bef Tax (EBT Tax @ 33.6% Net Income
FY 3/20 FY 3/21 FY 3/22 385.5 393.4 401.1
FY 3/23 FY 3/24 410.4 421.7
5.2
5.2
5.2
5.2
5.2
380.3 127.8 252.5
388.2 130.4 257.8
395.9 133.0 262.9
405.2 136.1 269.0
416.5 139.9 276.6
Note 1. Optionally convertible debentures of Rs 65 crore is assumed to be retained as debt forever.
Estimated Free Cash Flow to Equity (FCFE)
Amount in Crore Net Income Depreciation (1) Changes in working capital(2) Capital Expenditure (3) Debt raised / (repaid) (4) Free Cash Flow to Equity(FCFE)
FY 3/20 FY 3/21 FY 3/22 FY 3/23 FY 3/24 252. 257. 262.9 269. 276. 5 8 0 6 (101.1) (104.4) (107.7) (111.5) (115.9) (10.0) (11.0) (12.1) (13.3) (14.6) 141. 142. 143.0 144. 146. 4 4 2 0
Estimated Cost of Equity (Ke) for ABC Ltd Implied Equity Risk Premium (1) Risk Free Rate (10 year Govt of India bond yield) Beta for Abc(2)
7.412% 7.409%
Ke
16.60%
1.24
Discounted Cash Flow (DCF) valuation of ABC Amount in Crore Free Cash Flow to Equity (FCFE) Terminal Cash Flow Terminal Growth in Cash Flow Ke Net Present Value (NPV)
FY 3/19 141.4
FY 3/20 142.4
FY 3/21 143.0
FY 3/22 144.2
FY 3/23 146.0 1,321.7
5.00% 16.60% 0.86 1,075 121.2 .2 Rs million 155.47
0.74 104.7
0.63 90.2
Notes 1. Terminal Growth Rate - 5% terminal growth is assumed given the growth
0.54 78.0
0.46 681.0
Thank You. 1. 2.
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