I don't know if it's luck (a laugh is in order here), or if all the valuations we have done have resulted in deals. I started studying valuation in 2009 out of curiosity.
In 2009 I was starting M&A and JV projects between Chinese companies and Brazilian companies. I still had no idea exactly how to do a valuation, so I started to study the subject. I took some courses about it, based on the course of financial feasibility analysis that I took at FGV, then I took a semester of Aswath Damodara, professor at New York University and read some of his papers about "Young Companies" and continued studying materials from ABNT, reports from other firms.
From 2011 to 2015 I did some defenses for the Buyer side, and then I started to elaborate studies for the seller side, since then I have been deepening in the various techniques that are worth commenting on:
FCLD - Discounted Free Cash Flow - Where we project the company's free cash flow based on assumptions that need to be defended and bring the FCLD value to present value discounting the WAAC - The Weighted Average Cost of Capital
WACC = (Ke x We) + (Kd x Wd)
where:
Kd is the cost of third-party capital (external sources);
Ke is the cost of own capital (internal sources);
We is the proportion of equity capital in total debt;
Wd is the proportion of third party capital in total debt.
Sounds easy, doesn't it? But that's not all. It is necessary to understand a few things behind it:
Cash Flow Projection Time:
For Technology companies 3 years due to the deterioration cycle and technological innovation.
For conservative companies 5 years:
For Concessions and Mining companies it is linked to the exploration time:
And what rates to use to calculate the cost of equity?
Ke = Rf + ß[Rm-Rf]
Where:
Ke = Cost of Equity:
Rf = Risk-free interest rate (TR or LCD).
ß= Beta coefficient of the stock*: Rf
Rm = Return of Market Portfolio (IBOVESPA)
Rm-Rf = Market Risk Premium:
ßx(Rm-Rf) = Premium for Active Risk:
➝ ß = What is the beta index? The beta index is a measure of the risk and return of a given asset, relative to the market as a whole. Thus, it can be a measure of the risk that an asset presents when the financial market is impacted by a certain condition, such as a global crisis.
But they have even more details, which market index to use?
From which period?
I particularly use an index that represents the current market trend, but in years where the market oscillations are not normal behavior, either atypical years are discarded to generate an average or a longer period is used as the basis. Or both, the long period taking atypical years out of the calculation.
I do this analysis according to the company and its sector, if the company has a long history and its sector is a conservative one a long term index may make more sense in the case of newer companies a shorter period would make more sense.
These are some details that require further study and knowledge, there are also discounts to be applied by company size, dependence on partners or others that need to be studied in the valuation.
As for the valuation by EBITIDA this is easier but at the same time requires certain analysis, and one of them is when to use the EBITIDA Multiple.
The EBITIDA multiple considers the operational result of a company and how many times the market has paid for similar companies in the market. For the private market of small and medium sized companies it makes sense to use an EBITIDA multiple because it refers to what the market itself has paid for similar companies, unlike FCLD which considers the value over the opportunity cost by discounting the average cost of capital over time and bringing to present value the financial gains of a company.
Revenue Multiple can also be used in the case of companies that have insignificant costs and expenses in a deal where costs and expenses will be absorbed by the buyer and its structure.
Another analysis is Post Money or Pre Money - Evaluating the company after the capital invested can make more sense for projects in their early stages (green and brown field, where the potential is not in its current state today but in its state of growth after receiving capital. It can be done both before and after the entry of the resource to understand what the potential gain in value that the company will have with the entry of external capital and what it would have with equity.
And most important are premises between them:
Projection of the company's sales growth:
Projection of cost increase:
Discount rate projection:
Other projected data:
Variables applied in the projections of the company need to be well justified with data from the company itself and external data (market and other companies in the segment). This justification can be the great differential of a valuation.
With the above diverse knowledge and by performing valuations of small companies, gold mines, water mines, concessions, wholesalers, retailers, industries, and startups I was able to succeed in the projects I participated in.
Today we have an area prepared to perform Due Diligences, Valuations, act as Financial Advisor intermediating negotiations. We work with several partner law firms and investment banks. If you are interested in learning more, or in partnering with our company and our services in M&A, JV, management of acquired companies, and controllership of the same, visit our site www.airbpo.com.br and contact us.
Jean Apolidorio
CEO - AIRBPO
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