The ACG Cup
Competition Workshop
Kenneth E. Jones
Boathouse Capital
February 6, 2012
What We Are Going to Cover
I.
Presentation Skills and Organization
II.
Valuation of Private Companies
III.
Private Company Financial Metrics
IV.
How to Avoid Mistakes
I. Presentation Skills and
Organization
Presentation Skills and Organization
The best case covers all the fundamentals and is professionally
delivered both verbally and visually
Some tips on how to deliver the best case:
 Everyone should have a speaking part; not just pushing a button
 State your assumptions and elaborate on the premise
 Use all relevant valuation methods
 Provide a pitch book quality presentation
 Use PowerPoint and Excel to create charts and graphs
 Understandable and Pithy – re-write and edit it down to the
essence; use oral skills to add color or explanations
 Organization of Presentation
 Be concise and use an orderly format
 Index, Executive Summary, Presentation, Conclusion,
Appendices
1
II. Valuation of Private
Companies
Valuation of Private Companies
Valuation Methodologies
There are four most commonly used valuation methods
1. Comparable transactions
2. Comparable public companies
3. Discounted cash flow
4. LBO Valuation
2
Valuation of Private Companies
Valuation Methods – Comparable Transactions
Theory: Companies bought and sold in similar industries can be used
to value a private company. Use multiples of sales, EBITDA and EBIT.
•
•
•
•
•
M&A multiples can be applied directly to private company earnings
and sales without adjusting for a control premium
Private sales are difficult to get good information
Adjustments to EBITDA may not be factored into the multiple (more
about that)
Many times, you can’t assemble enough transactions to be
meaningful
Only use transactions that have occurred in the last 24 months
3
Valuation of Private Companies
Valuation Methods – Comparable Public Companies
Theory: Public companies are valued every second of every day by
millions of investors. Every piece of public information is reflected in the
stock and bond price.
•
•
•
•
Provides a quick means to value a company by referring to other
publicly-traded companies in the same industry with similar
operating and financial statistics
Calculate valuation multiples, which can be applied to private
company earnings
Control premiums – stock prices are for minority positions. Must
increase the value for control – what’s control worth?
Finding the right companies is difficult – case studies typically give
you the comparables
4
Valuation of Private Companies
Valuation Methods – Discounted Cash Flow (DCF)
Theory: DCF is a method of valuing a company utilizing the projected debt
free cash flows discounted back to a present value using a discount rate
computed using the Weighted Average Cost of Capital (WACC).
•
•
•
•
•
DCFs typically derive the highest values
The most assumption-laden method, all based on the future
Need a realistic 5-year projected income statement and balance sheet
(Capex and working capital)
Sales growth rate, margins and discount rates are key to value
Graded on getting the method generally right, not necessarily the right
answer
5
Valuation of Private Companies
Valuation Methods – LBO Analysis
Theory: By leveraging equity with debt and deriving an acceptable return on
the equity, you can value the company based on market rates of return for
debt and equity.
•
•
•
•
•
Entails running a model using company projections and a market-based
capital structure
Must be knowledgeable about and apply market levels of debt and equity
to the now leveraged company – usually contained in the case study
Growth of private equity markets has made this method a necessary one
Unlike a strategic acquirer, a LBO value ignores synergies
Value obtained is sensitive to projections and aggressiveness of operating
assumptions
6
III. Private Company
Financial Metrics
Private Company Financial Metrics
Definitions

EBITDA – Earnings before interest, taxes, depreciation and
amortization. Measure of cash produced by the company’s
operations. Usually with private companies, there are adjustments.

EBITDA less CAPEX – Reducing EBITDA by the amount of capital
expenditures derives a better measure of cash flow to service debt
and taxes

Debt to EBITDA – Ratio of interest bearing debt to company’s LTM
(last twelve months) EBITDA. This is the ratio that leveraged
lenders use to determine the maximum level of debt a company can
handle. With companies with less than $10mm of EBITDA, 2.5x –
3.5x is typical; over $10mm, 3.5x – 5.0x.
7
Private Company Financial Metrics
Definitions (cont.)

Senior debt – First lien bank debt – refer to case study for pricing

Subordinated or Mezzanine debt – Term debt that is second in
priority to senior debt; typically provided by funds and private finance
companies.

Equity Value – Market Capitalization for public companies (# of
shares times the share price). For a private company equal to
Enterprise Value minus debt plus cash (net debt).

Enterprise Value – Equal to interest bearing debt and equity value
minus cash on the balance sheet (net debt). This is the value of a
company. Also calculated by multiplying LTM EBITDA by a market
multiple.
8
Private Company Financial Metrics
Example of an enterprise and equity value calculation:
9
IV. How To Avoid Mistakes
How To Avoid Mistakes
1) Use all appropriate valuation methods – the case will give you
enough information to do those that are possible
2) Remember your audience and who hired you – the Board of
Directors whose foremost fiduciary responsibility are to the owners
of the business.
3) DO NOT get bogged down in the details. Board members will ask a
detailed question if they believe you glossed over something
important. Put detail in appendix.
4) The cases typically give you more information than you need. You
do not need to use everything that is in the case.
5) Make sure you answer the questions the Board is asking contained
in the preamble of the case.
10
How To Avoid Mistakes
6) Focus on Enterprise Value – many contestants only focus on Equity
Value and forget about the Debt.
7) Have a handout that is identical to your presentation to the board on
the screen.
8) Unless necessary, don’t regurgitate the financial statements in your
presentation.
9) LTM earnings is the only relevant number to use for valuation
purposes.
10) Make sure the presentation doesn’t switch between landscape and
portrait.
11
ACG Philadelphia Cup 2012
GOOD LUCK!!!