Other Valuation Methods

Private company valuation is more of an art form than a precise science. Here at PrivCo, we strive to deliver the best data to enable a variety of valuation methods. Here are a few common ones that fit different types of businesses and industries:

Asset Appraisal
Break-up Analysis
Internal Rate of Return
LBO Analysis
Replacement Cost
Total Invested Capital

Asset Appraisal—Asset valuation applies to companies that have heavy fixed assets, such as manufacturing plants or refineries; it is appropriate to value the assets independently from the firm. An asset appraisal will yield a more accurate valuation than a discounted cash flow analysis in private companies such as these. In this method, the fair market value of fixed assets and equipment (FMV/FA) is calculated as a means of evaluating the business.

Break-up Analysis—A break-up analysis is simply a sum of parts valuation based on different business lines. Each part is valued separately employing above methodologies and then summed together. This is very relevant for private companies with dissimilar business lines.

Internal Rate of Return—Internal Rate of Return is a valuation methodology that can be used to calculate the entry price, exit price, or average cash flows in an investment. IRR, given certain inputs such as exit price and cash flows within the investment, can be used to calculate a desired return rate, entry price, or other factors.Given the high risk on investment in venture capital and private equity, the firms require a high IRR in their target companies. In this case, the IRR represents the percentage of profits made on an investment in a specific period of time. Technically, the internal rate of return is the discount rate that generates a zero net present value.Ex. A firm acquires a private company for $35 million in 2011 and exits in 2012 at $70 million. The firms IRR is 100% with a return of $35 million and an NPV of $0.Price Exited / (1 + r )^t – Price Entered.

LBO Analysis—Another valuation methodology that is used is Leveraged Buyout or “LBO” analysis. Leverage is simply the use of debt; an LBO is the purchase of a private company through the use of borrowed funds, or debt. This method is used to determine the range of prices that a financial buyer would be willing to pay for a company based on target rates of return to equity (IRRs) and leveraged capital structure. Typically, the target company of an LBO analysis is public. The public equity is being bought out by a small number of investors, thus taking the public company private. In some cases, an LBO involves strong management support and participation. In such a case, management, with the help of a private equity firm, employ their own funds to take the public company private. This is also referred to as a Management Buyout.

Replacement Cost—Similar to the total invested capital valuation; replacement cost valuation considers the total cost of reproducing the operations of the business in today’s environment. This accounts for start-up expenses, real estate, equipment, and inventory and labor costs.

Total Invested Capital—Cash generated by the assets of the business (tangible and intangible) available for distribution to all providers of capital. FCF is often referred to as unlevered free cash flow, as it represents cash flow available to all providers of capital and is not affected by the capital structure of the business.