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## How to Calculate the Enterprise Value of Private Companies

March 7th, 2009 | |

Calculating the Enterprise Value of public companies is a pretty simple math exercise.  As I described in an earlier post, Cost of Financial Illiteracy: How to Calculate Enterprise Value, all you need is access to some information about the company’s stock and a recent set of their financial statements.  Once you have those it’s as simple as Market Cap – Cash & Marketable Securities + Debt = Enterprise Value.  Of course there are a few other nuances but for 95% of the companies you could look at this formula will work just fine.

The challenge a lot of people have, however, is how to calculate the enterprise value of private / non-public companies.  Unless you have access to the target company’s financial statements, the simple, honest answer is that in most cases you cannot determine a private company’s enterprise value with any degree of certainty.  You can determine an approximate range of enterprise values with a bit of research and Internet data mining.

We will use an example to make this process real.  Let’s say that you are interested in estimating the enterprise value of the popular retailer Crate & Barrel.  Here is a four step process you can use:

1. Find Basic Information about Crate & Barrel.  The first thing you need to do is gather some basic information about Crate & Barrel.  You are looking for information about the total number of employees and estimated revenues.  Even though Crate & Barrel is a private company, there are several places where this type of information is readily available.  For medium to large companies (>\$25 million revenue/year) Hoovers and Yahoo business profiles are good places to start.  A simple Google search works just as well.  In the case of Crate & Barrel a little surfing revealed that the chain is actually owned by Euromarket Designs, Inc. – a German company.  So the next step would be to do a little surfing on Euromarket Designs, Inc.  It was pretty easy to find this profile on Yahoo that shows that Euromarket Designs, Inc. did approximately \$401 million in revenue in 2007 and had approximately 6,000 employees.  You should cross check results with another site to see if the data is consistent.  This profile on Hoovers confirms the 6,000 employee figure.

If you cannot find the company you are researching in the major business information portals like Hoovers or Yahoo you can use a specialized portal like Manta.  Manta tracks information on 63 million small to medium sized business.  If you strike out on Manta, the last place to look is Dun & Bradstreet.  The challenge with D&B is that they will charge you \$39.99 for a basic background report (they used to only charge \$9.99 but I guess times have changed.)

2. Find Industry Comparables.  The second step in the process is to build a list of public companies that are in basically the same industry as the company you are targeting.  You can leverage the same profiles and information sources you used to find basic information about Crate & Barrel – Yahoo, Hoovers, Manta, or D&B – to find a list of competitors.  You should come up with a list of at least three companies.  Public companies are highly preferable but you can make do with only two public companies and multiple private companies.  In the case of Crate & Barrel we identified three good public company competitors – Bed, Bath & Beyond, Ethan Allen, and La-Z-Boy.

3. Build Summary Metrics Matrix.  The third step in the process is to build a summary spreadsheet of a few key financial and business metrics.  Take a look at the following spreadsheet:

 Metric Bed Bath & Beyond Ethan Allen Stores La Z Boy Revenues \$M (ttm) \$     7,048 \$       867 \$    1,310 EBITDA \$M (ttm) \$        874 \$         88 \$         (2) Full Time Employees 39,000 5,800 10,057 Market Cap \$M \$     5,350 \$       270 \$         53 Cash \$M \$        237 \$         64 \$         18 Debt \$M \$          – \$       203 \$         90 Enterprise Value \$M \$     5,250 \$       417 \$       126 EV/Revenue Multiple .7x .5x .1x Revenue / Employee \$ 180,718 \$ 149,483 \$ 130,258 EV / FTE \$ 134,615 \$   71,852 \$   12,501

Probably the best place to get the numbers to populate this spreadsheet is from Yahoo Finance’s ‘Key Statistics’.  For example, here are links to Bed, Bath & Beyond (BBBY), Ethan Allen (ETH), and La-Z-Boy (LZB) key statistic pages.  As the spreadsheet indicates there is a wide variation in valuation between the various companies.  In this sample set Bed, Bath, & Beyond is clearly the market leader in terms of revenue, profitability, and enterprise value while La-Z-Boy is clearly the worst.  In the next step of the process we will use the information gathered in this analysis to estimate Crate & Barrel’s enterprise value.

4. Develop Enterprise Value Estimates.  The last step in the process is to apply the facts you learned studying the competitors to what you know about Crate & Barrel.  Take a look at the following table:

 Crate & Barrel Revenues \$M \$          401 Employees 6,000 Revenue/Employee \$     66,833 Enterprise Value Estimates \$M High EV [Revenue Multiple] \$          299 Avg EV [Revenue Multiple \$          193 High EV [EV/FTE] \$          808 Avg EV  [EV/FTE] \$          431 Overall Average EV Estimate \$          433

This spreadsheet leverages what we know about Crate & Barrel (\$401 million revenue and 6,000 employees) and then calculates a range of possible enterprise values by using the multiples contained in the competitor analysis.  When you look at the competitor analysis it is very clear that La-Z-Boy has a very distressed valuation – a \$53 million market cap, a \$126 million enterprise value, and 0.1x Enterprise Value/Revenue multiple for a company that does over \$1 billion in revenues is basically an insult from the market.  For the purposes of this analysis I excluded La-Z-Boy from the analysis.  The EV estimates were calculated by using two factors from the competitor analysis – the Enterprise Value/Revenue multiple and the Enterprise Value / Employee multiple.  When you apply those multiples against the facts we know about Crate & Barrel you end up with a possible Enterprise Value range of \$193 million to \$808 million, with an average of \$433 million.  To be conservative I would estimate Crate & Barrel’s enterprise value to be between \$350 and \$450 million.

Summary

Calculating the Enterprise Value of private companies is not an easy task, but it is doable if you are willing to put in the time and energy to do some basic research.  There are other factors aside from the simple multiple analysis you can use to adjust your estimates but this approach will at least get you into the ballpark.  If you need some help on a particularly vexing private company valuation research project drop me a note and I would be glad to give you some advice.

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