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Valuation is critical in a business acquisition. The acquisition agreement needs to support valuation assumptions and appropriately allocate risks between the parties with respect to these calculations. Professionals framing these agreements need to communicate or the risk allocation for key valuation assumptions may not comply with the parties’ expectations. This presentation will be a guide for fostering that collaboration.
Citation preview
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Lawyer Appraiser
Accountant
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Price Earnings
Known Company (Comparable)
Unknown Company (Target)
$20,000,000
$1,000,000
?
$500,000 = =
Comparable Transactions (numbers in millions)
Company Date EBITDA Sale Price Multiple
ABC 1/1/2013 10 99 9.9
DEF 2/1/2013 6 45 7.5
GHI 3/1/2013 5 35 7
JKL 4/1/2013 15 150 10
Average Multiple: 8.6
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Free Cash Flow Growth
-
2.00
4.00
6.00
8.00
10.00
12.00
2010 2011 2012 2013 2014 2015 2016
Year
Ca
sh
Flo
w (
in m
illio
ns
)
CapEX
Cash Flow
Year Discount Rate
2010 2011 2012 2013 2014 2015 2016 NPV
Free Cash Flow
0% 6.0 6.3 6.7 7.1 7.5 8.0 8.5 50.3
12% 6.0 5.6 5.3 5.0 4.8 4.5 4.3 35.8
14% 6.0 5.5 5.1 4.8 4.4 4.1 3.8 34.1
16% 6.0 5.4 5.0 4.5 4.1 3.8 3.4 32.5
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TARGET COMPANY: Motorcycle Sales
METRIC: 3x Sales
COMPARABLE: Harley Davidson
Reported Revenue Actual Revenue Overstatement
Reported Valuation
Actual Valuation Overstatement
$10,000 $9,000 $1,000
$30,000 $27,000
$3,000
Effect of Revenue Overstatement on P/Sales Valuation
$10,000 $9,000
$1,000
$30,000 $27,000
$3,000
Reported Revenue
Actual Revenue
Overstatement Reported Valuation
Actual Valuation
Overstatement
Do
llar
Val
ue
(in
1,0
00
s)
TARGET COMPANY: Motorcycle Seller
METRIC: 20x Earnings
COMPARABLE: Harley Davidson
Reported Revenue Actual Revenue
Reported Earnings Actual Earnings
Revenue Overstatement
Reported Valuation Actual Valuation
Overstatement
$10,000 $9,000 $1,500
$500 $1,000
$30,000 $10,000 $20,000
Revenue Overstatement in P/E Valuation
$10,000 $9,000
$1,000
$30,000
$10,000
$20,000
Reported Revenue
Actual Revenue
Revenue Overstatement
Reported Valuation
Actual Valuation
Overstatement
Do
llar
Val
ue
s (1
,00
0s)
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Revenue Cost of Goods Sold
Gross Profit
Administrative Expenses Net Income
Automobile Leases
Aircraft Costs Lease for Shared Office
Net Savings to Buyer
20x Earnings Value Increase
Value without Add-Backs Value with Add-Backs
$30,000,000 25,000,000
5,000,000
3,500,000 $1,500,000
$50,000 400,000
50,000 $500,000
$10,000,000
$30,000,000 $40,000,000
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Showing Value of Add-backs
$30,000,000
$40,000,000
Value without Add-Backs Value with Add-Backs
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