Private Company Valuation Lecture Notes

Introduction

• Topic: Valuing Private Companies.
• Common Question: How to value a private company? Is it different from valuing public companies?
• Context: Covered in Financial Modelling Fundamentals course.

Case Studies

1. Kakao & Daum: Reverse merger, Kakao (private) and Daum (public).
2. Hypothetical Business: Using fake numbers to demonstrate principles.

Key Concepts

Types of Private Companies

1. Money Businesses

   • Small, family-owned.
   • Example: Restaurants, small law or tax firms, barber shops.

2. Venture-backed Startups (Meth Businesses)

   • Focused on scaling.
   • Example: KakaoTalk, WhatsApp, Instagram.

3. Empire Businesses

   • Large with potential for IPO.
   • Managed with boards and teams.

Valuation Differences

• Empire Businesses: Similar to public companies, minor discounts.
• Meth Businesses: IPO valuation important, more differences.
• Money Businesses: Require financial statement adjustments and DCF analysis modifications.

Financial Statement Adjustments

• Private Companies often have:
  • Non-standard accounting categories.
  • Owners' expenses are often expensed incorrectly.
  • Different tax treatments.
  • Adjust statements for realistic profitability.

Example Adjustments

• Normalize income statements.
• Include owner’s salary and adjust expense categories.
• Adjust tax rates for future projections.

Valuation Techniques

• Discounts: Apply illiquidity discounts to comps.
  • Range: 10%-30% or more.
• Comparable Analysis
  • Adjust multiples by discount percentage.
• Precedent Transactions
  • Look for premiums paid and adjust accordingly.

Discounted Cash Flow Analysis

• Problems: No market cap or beta for private companies.
• Solutions:
  • Use industry averages for discount rates.
  • Adjust terminal value assumptions, especially for "money businesses".

Methods for Terminal Value

• Discounted Terminal Value: Apply a discount to terminal value.
• Liquidation Value: Assume business sells off its assets.
• No Terminal Value: Project cash flows into the future without a terminal value assumption.

Conclusion

• Adjustments Necessary: Private companies require significant valuation adjustments.
• Greater Risk: Private companies are riskier and less liquid.
• Recap:
  • Empire Businesses: Minor differences.
  • Meth Businesses: Larger adjustments.
  • Money Businesses: Most significant differences.
• General Rule: Private companies are worth less than public due to higher risk and less liquidity.

This overview was condensed into approximately 20 minutes focusing on essential points in private company valuation.