Tag Archives | valuation

What is a Term Sheet?

See Also:
Other Peoples Money
Angel Investor
Venture Capital
5 Cs of Credit
Working Capital

What is a Term Sheet?

What is a term sheet? It contains the terms of an investment made by a venture capital firm. It is a summary of the legal and financial terms of a proposed deal. Basically it is a letter of intent (LOI) for venture capital investments.

Term Sheet & Valuations

It is important to understand the pre and post money valuations of your firm if you are taking on a VC partner. Contain the details of these valuations within the term sheet. It is important to understand how much of the equity you will hold after the transaction. Each round of equity financing typically has its own terms.

Don’t leave any value on the table! Download the Top 10 Destroyers of Value whitepaper.

term sheet, What is a Term Sheet

Strategic CFO Lab Member Extra

Access your Exit Strategy Execution Plan in SCFO Lab. This tool enables you to maximize potential value before you exit.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

term sheet, What is a Term Sheet

 

Share this:
0

Valuation Methods

See Also:
Financial Ratios
Required Rate of Return
Internal Rate of Return Method
EBITDA Valuation
What is a Term Sheet?
Adjusted EBITDA
Multiple of Earnings
Business Valuation Purposes

Valuation Methods

There are a variety of approaches to valuing a firm and its equity. Two of the most popular approaches are discounted cash flow (DCF) methods and market earnings multiple based methods.

Discounted Cash Flow (DCF) Methods

Discounted cash flow methods generally project future expected cash flows. This method accomplishes that by discounting the value of each of those flows to present value using a discounted rate. Then, the method takes the sum of those discounted values to represent the total value of the firm or the total value of the equity.

Free Cash Flow to the Firm (FCFF)

This Free Cash Flow to the Firm (FCFF) method arrives at a total firm value. Free cash flow to equity (FCFE) values the total equity in a firm.

Market Earnings Multiple Methods

Market earnings multiple methods typically project out a future adjusted earnings amount for the next twelve months. This earning amount typically uses EBITDA (earnings before interest, taxes, depreciation, and amortization) or net income. It then multiplies that earnings estimate by a multiple which is within the range of what other similar firms have sold for in recent transactions.

Valuation Methods Synopsis

As one might expect, valuations can often become complex. The subject of the proper discount rate has spawned numerous books itself. Valuation can also bring up contentious issues, particularly when the ownership interest represents a controlling stake or there is a less than liquid market for that interest.

When a valuation becomes complex, it is standard practice to consult with a valuation firm. If you need help finding one, then we will get you connected with one of our strategic partners for your valuation needs. Fill out the following form below to get connected:

Your information will be received between 9-5 Monday through Friday. You can expect to hear back within 24 hours. We only use your information to contact you for the desired help.


valuation methods

Strategic CFO Lab Member Extra

Access your Exit Strategy Execution Plan in SCFO Lab. This tool enables you to maximize potential value before you exit.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

valuation methods

Share this:
0

Present Value (PV)

See Also:
Future Value
Adjusted Present Value (APV)
Net Present Value Method
Investment Analysis
Discount Rate

Present Value (PV) Definition

The present value is simply the value of future dollars or currency in present day terms. The present value is simply answering the question how much a dollar in the future is worth today.

Present Value (PV) Explanation

The present value is often used in valuation to discount projections that companies make about themselves so they can figure out how much the company stock price is or maybe its equity value. The present value becomes useful because of inflation. If inflation were to increase at an increasing rate then the company would see the present day dollar as less valuable to them.

Present Value (PV) Formula

The present value formula is as follows:
PV = FV/((1 + i)n)

Where:
PV = Present Value
FV = Future Value
i = rate
n = number of years or periods

Present Value (PV) Example

Jim Bob has just won the lottery. He has the choice of accepting the $2 million now, or he can accept $1 million now and another $2 million 5 years from now. Which of the choices should Jim Bob take? Assume a rate of 8%.

Option #1 PV = $2 million

Option #2 PV = $500,000 + $1,361,166 = 1,861,166

PV calculation:
PV = 2 million/((1+.08)5) = $1,361,166

Option #1 is better because it is worth more to you today than the present payment plus the payment at the end.

If you want to increase the value of your organization, then click here to download the Know Your Economics Worksheet.

Present Value (PV)

Strategic CFO Lab Member Extra

Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

Present Value (PV)

Share this:
0

Adjusted Present Value (APV) Method of Valuation

See Also:
Valuation Methods
Net Present Value Method
Internal Rate of Return Method
NPV vs IRR
Capitalization

Adjusted Present Value (APV) Method of Valuation Definition

Adjusted Present Value (APV) Method of Valuation is the net present value of a project if financed solely by equity (present value of un-leveraged cash flows) plus the present value of all the benefits of financing. Use this method for a highly leveraged project.

Valuing your company? Before you do that, download our Top 10 Destroyer of Value to maximize your company’s value. You don’t want to leave anything on the table.

Adjusted Present Value Method Calculation

1. Calculate the value of un-leveraged project by discounting the expected free cash flow to the firm at the un-leveraged cost of equity.

2. Then, calculate the expected tax benefit from a given level of debt by discounting the expected tax saving at the cost of debt to reflect the riskiness of this cash flow.

3. Finally, evaluate the effect of a given level of debt on the default risk of a company and expected bankruptcy costs.

Thus, the APV calculation is as follows:

Value of the operating assets = Un-levered firm value + PV of tax benefits – Expected Bankruptcy Costs

Adjusted present value = value of the operating assets + value of cash and marketable securities.

Adjusted Present Value Application

APV method is very similar to traditional discounted cash flow (DCF) model. However, instead of weighted average cost of capital(WACC), cash flows would be discounted at the cost of assets, and tax shields at the cost of debt. Technically, an APV valuation model combined impact of both growth and the tax shield of debt on the cost of capital, the cost of equity, and systematic risk. Thus it is a more flexible way of approaching valuation than other method. However, APV method has some flaws. Company value will be overstated when adding the tax benefits to un-levered company value to get the levered company value, especially for some companies with high debt ratios.

Take some time to read over our Top 10 Destroyers of Value whitepaper before you start your company’s valuation.

Adjusted Present Value (APV) Method of Valuation

Strategic CFO Lab Member Extra

Access your Cash Flow Tuneup Execution Plan in SCFO Lab. This tool enables you to quantify the cash unlocked in your company.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

Adjusted Present Value (APV) Method of Valuation

 

Share this:
0

NPV vs IRR

See also:
Net Present Value Method
NPV Versus Payback Method
Internal Rate of Return Method
Capital Budgeting Methods
Discount Rate
Weighted Average Cost of Capital
Discounted Cash Flow versus Internal Rate of Return (dcf vs irr)

NPV vs IRR

Key differences between the most popular methods, NPV vs IRR (the Net Present Value Method and Internal Rate of Return Method), include the following:

NPV Method

Calculate NPV in terms of currency. Then express IRR in terms of the percentage return a firm expects the capital project to return. Academic evidence suggests that the NPV Method is preferred over other methods since it calculates additional wealth and the IRR Method does not.

IRR Method

The IRR Method cannot be used to evaluate projects where there are changing cash flows For example, an initial outflow followed by in-flows and a later out-flow, such as may be required in the case of land reclamation by a mining firm. However, the IRR Method does have one significant advantage. Managers tend to better understand the concept of returns stated in percentages. They find it easy to compare to the required cost of capital.

NPV vs IRR Comparison

While both the NPV Method and the IRR Method are both DCF models and can even reach similar conclusions about a single project, the use of the IRR Method can lead to the belief that a smaller project with a shorter life and earlier cash inflows. This is preferable to a larger project that will generate more cash. Applying NPV using different discount rates will result in different recommendations. The IRR method always gives the same recommendation.


Are you in the process of selling your company? The first thing to do is to identify “destroyers” that can impact your company’s value.

Download The Top 10 Destroyers of Value


Other Variations of NPV vs IRR

Adjusted Present Value (APV)

The Adjusted Present Value (APV) Method is a flexible DCF method that takes into account interest related tax shields. Furthermore, it is designed for firms with active debt and a consistent market value leverage ratio.

Profitability Index (PI)

The Profitability Index (PI) Method, which is modeled after the NPV Method, is measured as the total present value of future net cash inflows divided by the initial investment. This method tends to favor smaller projects. Therefore, it is best used by firms with limited resources and high costs of capital.

Bailout Payback Method

The Bailout Payback Method is a variation of the Payback Method. Furthermore, it includes the salvage value of any equipment purchased in its calculations.

Real Options Approach

The Real Options Approach allows for flexibility and encourages constant reassessment based on the riskiness of the project’s cash flows. It is also based on the concept of creating a list of value-maximizing options to choose projects from. In fact, management can, and is encouraged, to react to changes that might affect the assumptions that were made about each project being considered prior to its commencement, including postponing the project if necessary. It is also noteworthy that there is not a lot of support for this method among financial managers at this time.

Both IRR and NPV are rates which assign value to your company. If you’re looking to sell your company, then download the free Top 10 Destroyers of Value whitepaper to learn how to maximize your value.

ROCE

Strategic CFO Lab Member Extra

Access your Exit Strategy Checklist Execution Plan in SCFO Lab. The step-by-step plan to get the most value out of your company when you sell.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

NPV vs IRR

Share this:
1

Liquidation Valuation

See Also:
Bankruptcy Information
Chapter 11 Bankruptcy
Bankruptcy Chapter 12
Chapter 13 Bankruptcy
Chapter 7 Bankruptcy
Bankruptcy Costs
How to Make Dramatic Changes in Business
Bankruptcy Courts

Liquidation Valuation Definition

Liquidation valuation is the value of a company that is bankrupt or going out of business. It is the value of the company’s assets, according to what they would be worth if they are sold off in order to repay creditors. This is in contrast to going concern value, which assumes the company will continue to operate for the foreseeable future. The difference between going concern value and liquidation value consists of intangible assets and goodwill.

Liquidation Valuation Example

For example, if a well-known apparel company is going out of business, it would have to sell off its assets – sewing machines, fabric, etc. – to pay creditors. The company would probably have to sell off its assets at a discount. In this case, the company would be valued according to its liquidation value. However, if the company is a going concern, it can continue to sell its brand-name clothing at a markup for a profit. It would then be valued according to its going concern value.

 

 

Don’t leave any value on the table! Download the Top 10 Destroyers of Value whitepaper.

Liquidation Valuation

Strategic CFO Lab Member Extra

Access your Exit Strategy Execution Plan in SCFO Lab. This tool enables you to maximize potential value before you exit.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

Liquidation Valuation

Share this:
0

Joint Venture (JV)

See Also:
Joint Costs
Mergers and Acquisitions (M&A)
Enterprise Value (EV)
Due Diligence
C Corporation

Joint Venture (JV) Definition

A joint venture or JV is simply the combination of two or more businesses which are joined to enter into a specific business venture. The relationship is temporary until a certain event occurs or the venture has run its course.

Joint Venture (JV) Meaning

Often, one enters into a Joint Venture when they see synergies between two companies. They can compliment each other as they both press into a new market activity. There is usually a fair amount of valuation involved to determine profit and loss sharing much like in a partnership. However, the combined JV entity is only treated as a partnership for tax purposes. The two companies considering a joint venture must establish several things before the JV agreement is final. Control over certain aspects of the JV as well as sharing of profits and losses. There is also a need to establish an exit plan because JVs are not permanent. After all of these negotiations the two companies can enter into the mutually beneficial relationship until one or both of the parties no longer see a benefit to continue the venture.

Before you enter a joint venture, your CEO needs to know how it will impact every area of the business – especially the financials. Learn how you can be the best wingman with our free How to be a Wingman guide!

Joint Venture

Strategic CFO Lab Member Extra

Access your Projections Execution Plan in SCFO Lab. The step-by-step plan to get ahead of your cash flow.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

Joint Venture

Share this:
0

LEARN THE ART OF THE CFO