There are a number of ways to value privately held stocks, all of
which are in some ways subjective. As such, there is no single way
that everyone uses, and the value of privately held stocks,
partnerships, and other such assets is frequently a source of
conflict. Partners argue about the cost of a buyout. Divorce attorneys
argue about the value of a spouse's ownership in a private business.
Taxpayers argue about capital gains in the event of a sale.
That said, I'm going to provide you with two ways to calculate the
value, both of which assume you have some financial data on the
company. If you have no financial data on the company, there is no
reliable way to value the stake.
There are two primary approaches to the valuation of assets for which
the market does not set prices. Both have their flaws, but calculating
the value of an investment using both methods, then comparing the
values, may be your best option.
Strategy #1:
Discounted cash flow valuation. This is the more technical of the two
methods, and considered by many financial analysts to be the gold
standard of valuation. In order to calculate the discounted cash flow
value, you need to determine the cost of equity and the firm's cost of
capital. You also need to determine the firm's cash flows and estimate
the firm's future earnings growth.
400-page books have been written on the above issues, and such
calculations are extremely firm-specific. The DCF equation is
straightforward. But the method for determining the inputs is not.
The discounted cash flow valuation is the sum of the company?s cash
flows, discounted at a set rate to reflect the risk of those cash
flows. The formula for a discounted cash flow is written as:
CFt/(1+r)t -- The cash flow for period ?t?, divided by one plus the
discount rate, raised to the power of t. The value of the firm or the
equity stake is the sum of the future cash flows, usually representing
fixed amounts for five or 10 years, and an estimated terminal value.
For additional details about how the process works, check out
http://www.creativeacademics.com/finance/dcf.html#work
The difficulty here is not in the calculation, but in the assumptions
of future cash flows and the discount rate. The discount rate is
probably the most difficult to determine.
Once you have determined your inputs, the calculator at
http://www.creativeacademics.com/finance/dcf.html will calculate a
value for you. Alternatively, you could come up with ballpark
estimates for your company and calculate an estimated valuation that
will serve as a check on the other calculated values.
As for developing your assumptions, I cannot help you in detail. This
forum is inadequate for providing instructions, as the determination
of the cost of equity, cost of capital, and cash flows are tasks both
complex and company-specific. The access you have to company financial
data and the quality of that data will determine the difficulty of
calculating the cost of capital and estimating cash flows. However,
any advice I give you without spending hours examining your company?s
books and familiarizing myself with its operations would have little
practical value. If your stake has a substantial value, I?d advise
hiring an accountant to help you determine the inputs. Alternatively,
if you have good data and don?t mind crunching numbers, I have
provided some links that can help you do the math. Warning: This is
not for the faint of heart.
http://www.business.com/bdcframe.asp?ticker=&src=http%3A//rd.business.com/index.asp%3Fbdcz%3Dil.l.ml.e%26bdcr%3D5%26bdcu%3Dhttp%253A//www.stern.nyu.edu/%257Eadamodar/pc/model.xls%26bdcs%3D9BD1C5E4-0CE0-47CA-9EFF-A1DCAE0F177020041262915615%26bdcf%3D6e258a3a-10e2-11d4-8f60-00d0b7473557%26bdcp%3D%26partner%3Dbdc%26title%3DAswath%2520Damadoran%253A%2520Spreadsheet%2520for%2520Choosing%2520Appropriate%
2520DCF%2520Model&back=http%3A//www.business.com/directory/financial_services/investment_banking_and_brokerage/mergers_and_acquisitions_manda/business_valuation_techniques/discounted_cash_flows_dcf/&path=/directory/financial_services/investment_banking_and_brokerage/mergers_and_acquisitions_manda/business_valuation_techniques/discounted_cash_flows_dcf
http://www.business.com/bdcframe.asp?ticker=&src=http%3A//rd.business.com/index.asp%3Fbdcz%3Dil.l.ml.e%26bdcr%3D3%26bdcu%3Dhttp%253A//www.stern.nyu.edu/%257Eadamodar/New_Home_Page/lectures/dcfinput.html%26bdcs%3D9BD1C5E4-0CE0-47CA-9EFF-A1DCAE0F177020041262915615%26bdcf%3D6e258a3a-10e2-11d4-8f60-00d0b7473557%26bdcp%3D%26partner%3Dbdc%26title%3DAswath%2520Damadoran%253A%2520Estimating%2520Inputs%252
0for%2520Discounted%2520Cash%2520Flow%2520Valuation&back=http%3A//www.business.com/directory/financial_services/investment_banking_and_brokerage/mergers_and_acquisitions_manda/business_valuation_techniques/discounted_cash_flows_dcf/&path=/directory/financial_services/investment_banking_and_brokerage/mergers_and_acquisitions_manda/business_valuation_techniques/discounted_cash_flows_dcf
http://www.valuatum.com/tutorials/dcf_valuation.shtml
http://bluechips.uchicago.edu/dcfinput.pdf
Notice that the name of Aswath Damodaran keeps coming up. He?s the hot
writer on this topic, having written several books on asset valuation.
If you?re serious about discounted cash flow valuation, it may behoove
you to purchase one of his books, such as ?Damodaran on Valuation,?
available for $32 at half.com
(http://half.ebay.com/cat/buy/prod.cgi?cpid=653235&domain_id=1856&meta_id=1)
or ?Investment Valuation,? available for $37.12 at half .com
(http://half.ebay.com/cat/buy/prod.cgi?cpid=1068454050&domain_id=1856&meta_id=1).
Strategy #2:
Relative valuation is a much simpler method, though it?s arguably not
as precise, as it does not reflect ways in which your company differs
from its competitors.
To use relative valuation, simply compare your company to the average
valuation of its industry group. For instance, if your company had $10
million in sales last year, and the average price/sales ratio for the
industry is 2.5, then your company should be worth about $25 million.
Common valuation measures used in this fashion are price/earnings,
price/sales, price/book value, and price/cash flow.
As I said, this method is less precise than DCF analysis. But the
advantage is that the calculations are much simpler. Determine your
company?s sales, profits, book value, and cash flow. Then obtain the
average valuation of the industry, and you can calculate an estimated
value for your company. Keep in mind that nontraded stocks are subject
to an illiquidity discount. So if a public company with a similar
operating climate and similar risk is worth 15 times earnings, your
private company will be worth somewhat less, perhaps 10 or 12 times
earnings. Still, relative valuation can give you a ballpark figure.
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