1. Fundamentals of Valuation
M&A for Entrepreneurs Elective
© 2008 Babson College

2. Acquisition Process
 Acquisition Strategy
 Targeting, Analysis,
and Valuation
 Letter of Intent
 Due Diligence
 Negotiating an Agreement
 Closing and Management
Strategy
© 2008 Babson College

3. Targeting and Analysis
 Deliver a clear message
Size, Industry, Geography, Expertise
 Delineate a contact list and communications plan
 Arms length analysis and pro forma valuation
 Debt/equity pro forma
 Buyer’s value added
 Negotiating strategy
 Exit strategy
© 2008 Babson College

4. Why is the company for sale?
 Establishes credibility of deal
 ’Degree of Skepticism’
 Frames ‘Adjustments’ & Pro Formas
© 2008 Babson College

5. Public vs Privately-Owned Companies
 Decisiveness
 Quality of Information Provided
 Assumptions in Pro Formas
 Degree of Sophistication
 Supplier Relationships
 Customer Relationships
 “Hockey Stick”
 Quality of Management
 Tax Impact
© 2008 Babson College

6. Question to ask…
Is the company public?
or a subsidiary of a public company?
Or, privately owned?
© 2008 Babson College

7. The Analysis Process is LINKED
Assumptions are linked to analysis
Analysis is linked with adjustments
Adjustments impact valuation
and structure
Valuation and structure yields price
© 2008 Babson College

8. Where do Adjustments and Assumptions Impact?
 Income Statement
and Pro Forma Projections
 Balance Sheet
 Cash Flow Projections
 Buyer Value-Added
© 2008 Babson College

9. Cost of Capital
Cost of Capital = Discount Rate/Factor
Simple Cost of Capital Calculator:
Category Cost Weight Cost Weight
Bank Debt 50% 10% 5.0%
Mezzanine 30% 20% 6.0%
Equity 20% 40% 8.0%
Cost of Capital 19%
© 2008 Babson College

10. Valuation Methodologies
Primary Secondary
• DCF • Asset Value
• EBITDA/FCF • Replacement cost
Multiple
• Payback
• Industry
• ROI
Benchmarks
• Market Value
• Net Worth/
Book Value
© 2008 Babson College

11. Discounted Cash Flow (DCF)
1. Discount rate generally is cost of capital
2. Discount rate is higher with uncertain,
cyclical, vulnerable companies
3. Target yields:
 Banks: Prime + 2-4%
 Sub Debt/Mezzanine: 15-20% (plus Kicker)
 Equity: 20-40%
1. EBITDA/FCF assumptions are KEY
© 2008 Babson College

12. EBITDA/FCF Multiple
 4-8 Times EBITDA
 Pro Forma Adjustments
and Financial Integrity are KEY
 Used by Debt & Equity Providers
 Most Common Valuation Technique Used
© 2008 Babson College

13. Industry Benchmarks
 Industry ‘Comps’
 Revenue Multiple
 Customer List Multiple
 Installations Multiple
© 2008 Babson College

14. Appraisal Methodologies
 Liquidation or ‘Knockdown’ Appraisal
 Replacement Value Appraisal
 Fair Market Value Appraisal
 Balance Sheet: A/R=
Aging/Dilution/Allows./Bd.Dbt
 Inv.= Aging/Inventory Turn
© 2008 Babson College

15. In a Leveraged Buyout or Management Buyout
What is the
MOST IMPORTANT
Guiding Principle?
© 2008 Babson College

16. “Cash is King”
(Cash Flow/EBITDA/FCF)
© 2008 Babson College