Based on the information you find in the case material and the techniques you have learned in this course, please provided a pre-money valuation and a post-money valuation for PowerWater Beverages, Inc. You must tell me the techniques you will use up front, show your initial calculations, and explain your findings. Submit through Turn-it-in Assignment link.
Understand that the addition of a chunk of money into any company’s account immediately makes it more valuable. If we value Google at $1 billion and then we throw $1 million dollars into their bank account, then the value of Google has immediately increased by $1 million. Similarly, growing businesses are valued at a pre-money valuation in order to establish most of the deal terms and the post-money valuation becomes the pre-money valuation plus the amount of money invested in the company. It is important to establish both numbers and understand which number you are discussing when negotiating with an investor.
For this assignment, you must use multiple techniques to establish a valuation for PowerWater Beverages (each technique will give you a different valuation), decide how much to weigh the result of each technique, and establish a final pre and post-money valuation.
Pre-money valuation and explanation – 5 points
Post-money valuation and explanation – 5 points
Explanation of techniques, calculations, and correct use – 10 points
Explanation of Assignment 4
In addition to the 7 General Principles, the book outlines 3 broad categories of valuation techniques: discounted cash flow (DCF), liquidation, and market comparison. I would add a fourth category, which is income multiplier. While income multiplier could be used in either of the market comparison or DCF calculations, I think it deserves its own category since it is so often used on its own.
First of all, as we should all know by now, the only real measurement of what a company is worth is what someone is willing to pay for it. That being said, we should have an idea of what our company is worth if we want to sell it or get an investment (sell only a portion of the company).
I like to pick a number of different methods in order to find a high and low price. The liquidation value is generally a quick and easy calculation. I might also do a DCF analysis and then find some the values of comparable companies in the industry. Organizing these from high to low would give me a range of values to work within.
At this point, you need to start getting more specific. You will never have every number you need to get an exact calculation, so you need to understand that assumptions will need to be made. You will have to make your best guess based on industry analysis and other means. For example, the PowerWater case only gives you 3 years of Income Statements and Cash Flows. You are going to have to estimate the growth rate to do a full 5+ year DCF calculation.
Based on the assumptions you made, you will need to get a baseline valuation. Different techniques tend to prevail in various industries, but this generally comes down to whether you use DCF, some sort of multiplier, or use values of comparable companies (Examples: software companies tend to sell for some multiple of their revenue when being acquired by another software company, social media companies tend to sell for the value of each user multiplied by the number of users, and family-owned small businesses often sell for merely the value of their inventory). You will then adjust from there. If you use DCF or an income multiplier then you will want to adjust that number up or down based on the value of comparable companies, general economic trends, and investment alternatives. If you start with a value based on comparable companies, then you adjust that number up or down based on the individual company’s operational issues and the differences between this company and the others you used for comparison.
For example, if I have a drone manufacturing company that I’m looking to sell, I might see similar companies sold for $500,000. I would then look around the industry and see what other companies are doing. If other companies have similar revenue but better technology, better manufacturing capacity, and/or better future potential, that would lower the value of my company to a future investor (because they could invest in one of the other companies that might provide them with a better future return).
Investors will use all the ratios we discussed earlier in the semester to make adjustments. Our company might have a high debt ratio compared to this industry, this would lower our value. We might also have a higher return on sales than the industry average, which would increase our value. There are infinite ways for a company to be adjusted from the baseline calculation. The picture below illustrates how that looks.
Finally, your assumptions change everything when it comes to valuing a company. You could do multiple calculations based on different assumptions. Given time, most buyers will do calculations based on best case scenario, worst case scenario, and most likely scenario. These scenarios can refer to the success of the individual company or the larger economy it functions in. Some other decisions/assumptions you will have to make:
Valuing companies is as much art as it is science. The idea is to come up with the most accurate idea of what a buyer would be willing to pay. It is also important to understand that the buying process will come down to a negotiation, the seller wants the highest price possible and the buyer wants to pay as little as possible. It is important to treat the valuation derived from each technique as a single data point among many data points. Find a range you are comfortable with and try to negotiate it to the top of that range if you are a seller or the bottom of that range if you are a buyer.
*A note on pre vs post – Valuations are based on what the buisiness is worth now. If you are trying to raise money, then you would seek out the value of your company ($X) before receiving the investment you are seeking(pre-money). An infusion of cash is a very real and valuable asset. If the investment you are seeking is $Y, then the value of your company after you receive the investment of $Y is now $X + $Y (post-money). It’s a simple calculation but important to understand.