Build Value for High Exit – Financially, Operational and Strategically
Let’s say I am a startup, what’s my cost of capital? 20-80%. Growth rate? 15-40%. Mature companies? 10-25%.
That can create a large error.
Before and after tax rates.
If you don’t use the right rate, that creates an error. This one, most people don’t know nor have heard about. Does anybody not want to be in business longer than 5 years?
No? Are you exiting? You want to get out.
Okay. Usually, you have to take 5 years of financials, but the business is going to keep going for another 20 years. What credit do you get for the 20 years out if you don’t do something to give up the credit. You’re just going to get the 5 years.
It’s called the terminal value. You simulate selling the business in Year 5. Then you get the value of all of those years coming up to Year 5. It’s a huge error if you don’t do it. Then there’s discounts and waitings.
It’s not as easy as throwing a dart at the wall and everybody comes up with the same number. There’s lots of variability. However, you have to justify the variability.
Why would you discount your company value if you were selling a minority share?You don’t really have any control of what they decide to do. Right? You’re just going along for the ride and hope they do a good job?
If you are selling a block of shares in a minority- Let’s say your value is $10 million. You can discount that 14-40% depending on the situation. What if you were selling to somebody who is on the board? He or she has some say, so you wouldn’t discount it 40%. You might discount it 20%. So there’s minority.
What about marketability. Why would you discount something for marketability? What is marketability? You can sell your stock whenever you want, right? If you’re a public company, there’s no discount for marketability because you can sell it anytime you want.
If you are a privately held company, how do you liquidate your shares?
One way is to the other party. Or you sell it at interest. This discount ranges from 10 to 52% depending on the situation. Let’s say you have five buyers who were courting you. Would your marketability of discount be 50%?
It would be lower because you have people who are out there courting with you. You have to look at the situation and again, decide what the discount will be. Then there is an early stage discount for early companies. Then once you get all these 7 numbers, you have to determine the viability of each one. You weight them.
Okay, maybe history is worth 25%. But history projected 20%. Or you like management’s projection. It’s pretty solid. They have reoccurring revenue. They have systems. I am going to weight that one 50%. Then that’s depending on the appraiser and discussing with management the reliability of the data.
You can get to one number by weighting, but the beauty of this is that you have 7.
You can see what my asset sheet is worth. I can see what comparables are worth. I can see what five different scenarios of my discounted cash flow are worth and how I look at those to move my company to higher value.
Knowledge, again is power
This is a good topic, one that I have with business all the time.
Build value for high exit, Trevor, Atlanta, learned from Dale Richards Valuation Presentation
Build value for high-exit, Trevor, Atlanta, learned from Dale Richards Valuation Presentation. Dr. Travor learned key business concepts from Dale Richards’ presentation on Business Valuation Principles – How to Increase Your Business Value, Financially, Operational and Strategically. Listen and learn.