How do you value a company? (NB)

[petem]

A couple of weeks ago I was at an IT conference held by one of our IT suppliers. Anyway, this company is privately owned by a husband and wife who were speakers at the conference. The company has around 250 employees and has 2000 clients around the world. Tunover is around £80m p.a. and profit margin is around 30%. My mate reckons the company is worth around £1billion but I reckon that's miles too high. Could someone please tell me how much a company like this is worth.

Thanks, Pete

P.S. Yes they have got a boat but it's a saily thing I think.

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[Newbieknownowt]

You are a corporate financier and I claim my £5 ;-)



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[Newbieknownowt]

More seriously - sounds high on those figures but value depends on lots of things including solidity of IP, future prospects (ie likely market change/risk), market sentiment etc. Might have got a silly valuation for a technology company in '99 but investors (and VCs in particular) take a more sanguine view these days.

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[Tony7]

Depends on your 30% being EBIT or GM + all the other things said above, + trade sale or not. What its worth to the buyer etc.
Rule of thumb, 5 x EBIT + add backs in todays market.
Guess your co has a value of approx £80-125m
But thats only the value!!! what its worth or what a competitor may pay could be very different.

£1bn ? dont think so.

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[jfm]

There are a zillion factors that could affect value but ignoring anything not in your note a rough answer would be:

Forecast EBIT =£24m pa (30% x 80)
Assume EBITDA = EBIT
Enterprise Value = 6 or 7 times EBITDA mebbe, so enterprise value is say £150m
Add cash in company, subtract debt, and that gives you the value of the company itself.

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[Deleted User YDKXO]

There's 2 answers to this question

A) Whatever some fool is willing to pay or
B) A figure that some boffin's valuation model produces

The classic way to value a company is Net Assets + Goodwill which is another way of saying what jfm has already said. Net Assets is the figure you see on each side of the company's balance sheet and, in simple terms, is the sum of the company's assets less it's liabilities (fixed assets like property+stock+cash+debtors less liabilities like creditors+borrowings). Goodwill is a more difficult thing to value but represents the expectation that the company will make a profit in the future and is usually calculated as a multiple of years x the most recent net profit that the company has declared. A newish company may only attract a multiple of 2-3yrs, an established company in a mature market may attract a multiple of 4 - 7yrs and fast growing companies in growth markets may attract multiples in excess of 10 yrs. There are many ways of valuing net profit and some people argue that you should ignore interest paid and depreciation (not me)
Taking your £80m turnover company, its impossible to know what its net asset figure is without seeing the balance sheet but lets say it's £20m. A 30% net profit margin sounds high but lets take that anyway and lets say its a high flying company so give it a goodwill multiple of 8yrs so my back of a fag packet valuation would be

£20m + 8 x 30% x £80m = £212m

Nowhere near £1billion IMHO.

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[PGD]

The word amortisation springs to mind and the value of the brand on the balance sheet which can now be included I believe along with any IPR.

A nightmare in plain english !

Peter


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[tripleace]

with I.T stock at an all time low, values are what somebody is willing to pay.

just look at the IT sector.

example MEDIS which have world wide patent on prickless needles for the medical trade and with USA government approval to phase out needles are worth a few pence per share rather than the £2.00.

I suspect the only buyers will be competitors and if they know the business is for sale then they will either wait or make a silly offer




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[jfm]

target company\'s interest expense - valuations

Deleted User, agree what you say except the comment on interest. It is widely accepted now and totally logical to exclude interest from the earnings figure, before applying a multiple. This of course produces a higher value than if you had left the interest in. However you then subtract the redemption cost of the debt, to arrive at the share value.

This is self evidently correct (so far as anything in the valuation world can be correct......). The public equity markets failed to grasp this simple bit of corporate finance in the 1990s (and indeed the FT still publishes the outmoded p/e ratio, which are distorted by this illogical inclusion of interest) and a lot of people in private equity made a lot of money as a result.....

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[Kevin]

Call me tight but id value it at about £80 million if it had no significant assets.

no more than about 3 times its profit.

very generally speaking obv.

Kevin

 

[petem]

Thanks guys,

Excellent advice as ever.

Pete

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[woodie1000]

Hiya,
I am a research analyst that looks at IT companies and tries(!) to value them.

Value depends on a few things - as others have mentioned - is it a solid business or one that Microsoft etc could kill off. The other key element is the topline growth rate and whether the margin is a one-off or not.

If the 30% EBIT margin isn't a one-off......I would say at least 3x sales...so 3*80m. If the topline is growing as well then more.

Adam

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