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How to Calculate the Enterprise Value of Your Private Company

This post presents a simple process to calculate the enterprise value of your private company — it assumes that you have access to your firm’s recent financial statements.   If you are looking to estimate the enteprise value of another company that you do no thave access to their financials I suggest you check out another post entitled: How to Calculate the Enterprise Value of Private Companies.  

 Here is the basic formula to calculate enterprise value:

Enterprise value =

 common equity at equity value
 + debt at market value
 + minority interest at market value, if any
 – associate company at market value, if any
 + preferred equity at market value
 – cash and cash-equivalents.

Most of the information required to calculate your enterprise value is contained in your financial statements.  Cash and cash equivalents are the easiest since they are right on your balance sheet.  If your firm has debt, you need to calculate not only the outstanding balance but any prepayment or other charges that you would incur if you settled the debt today.  The same thing is true about preferred stock and liquidation preferences.  The value of preferred stock and its associated liquidation preferences should come right off of the stockholders equity section of your balance sheet.  If you have venture capital or private equity invested in your firm you should have a deep understanding of the impact of liquidation preferences.

The challenge with calculating enterprise value for private firms is the value of your common stock or equity.  For public firms this is easy – market capitalization is simply the current share price multiplied by the number of outstanding shares.  For private companies, however, there is no public market to value your stock on a daily basis.  Instead, you have to estimate its value by comparing yourself against other public companies.  You can do this by analyzing at least three public companies in your market place and applying some of their metrics to your situation.

To make this process a little clearer, let’s assume that you are a private provider of ERP solutions for the wholesale distribution marketplace.  Here is a snapshot of your business at this point in time:

 AB 1

To estimate your enterprise value, you need to compare yourself to some other public technology companies that are similar in size and nature to your business.  There’s no point in comparing your company to SAP or Oracle since those firms are 75 times the size of yours.  Four good candidates in the ERP space are MSC Software, i2, Epicor, and QAD.  Once you have identified some firms to compare against, develop a summary matrix of some key indicators, like the one shown below:

 AB 2

Next, develop a comparison matrix where you look at the ranges of key valuation metrics and decide where your company fits into the continuum, as shown below:

 AB 3

Another source of comparable statistics is the fairness opinions developed by investment bankers to support the paid by an acquirer for a particular company.  Often, summaries of these documents are included in SEC filings associated with a public company involved in an acquisition.  Any time a public company in your market is involved in an acquisition, you should review the filings to see what tidbits you can learn.  Recently, Golden Gate Capital and Infor announced the acquisition of SoftBrands.  In conjunction with the deal, SoftBrands filed a pretty extensive proxy statement that included detailed information about the fairness opinion rendered by Piper Jaffray.  You can read the filing here.  The following table presents a list of 33 transactions between 2004 and 2009.  It is interesting to see how valuations changed over that time period.  The Enterprise Value / EBITDA multiple is a good bellwether metric that reached a peak in late 2006.

 AB 4

 The goal of this exercise is to leverage information about the valuation of the companies you are comparing yourself to so you can develop an estimate of your enterprise value.  A couple of notes.  First, you generally should base your calculations off of trailing twelve months (ttm) numbers.  This provides a better insight into your actual performance.  Management teams always have high expectations for the future and basing your enterprise value on anticipated performance is a bit of a crap shoot.  Also, most investors prefer to look at actual performance instead of management’s future projections.  Second, you need to have some logic to justify where you value your firm in the continuum of valuation metrics.  In this particular analysis I felt that the mythical ‘My Company’ was closer in nature and performance to MSC Software and Epicor than i2 or QAD.  Some of the factors in that decision making process were the relative strength of “My Company’s” EBITDA and its relatively strong cash/debt position.  If I were asked to estimate the enterprise value of ‘My Company’ based on the limited information presented here I would estimate a range of $275 million to $325 million. 

The approach to calculating enterprise value for your private company presented in this post is a quick and dirty technique.  It will get you into the relative valuation ballpark.  You can always hire an investment banker or a specialized valuation firm to develop a comprehensive analysis of your value

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