How to Estimate Private Company Value And Rate a Prospect With The Information

1. How to Estimate Private Company Value And Rate a Prospect With The Information David Lamb Consultant, Target Analytics May 2, 2008

2. Closely Held Stock • When a company incorporates, it issues shares, known as “outstanding stock” • The value of the company is divided evenly among the shares • “Publicly held” stock vs. “closely held” • Finding the value of public company stock is easy • Finding the value of private company stock is difficult and expensive

3. Why value a company? • The value of a company is influenced by the reason you’re asking the question • Reasons to value a private company: • To measure progress • To sell it • To raise capital from investors • Part of a divorce settlement • For a management buyout • For estate planning • For an employee stock ownership plan • For taxation • Change the purpose of the valuation and you change the stock price • Only fundraisers ask how it affects a gift

4. Valuation in the real world • Information typically is not available on private companies • The value of a company is not necessarily identical to the bottom line on the balance sheet • Companies with a negative cash flow can have a high value • Companies with a positive cash flow might have a modest value

5. Valuation in the real world • To find out what a company is worth, sell it • Value is partly (sometimes mostly) subjective • Sometimes D&B provides a net worth figure • Read everything you can about your target company – it’s not just numbers

6. Target Company • Iconic bookstore with three locations in the Denver metropolitan area • Annual sales are about $20 million per IAC Company Intelligence • Incorporated in 1973 • Report lists 5 named officers • Prospect is the CEO and founder • No % of ownership is reported

7. Ways to measure value • Book value • Price/earnings ratio (P/E) • Discounted cash flow • Comparison to similar companies of known value • Multiple: Known value/known annual sales • Apply the multiple to target company’s sales

8. Comparable companies • Find a similar public company • Downside: a public company is almost always valued higher than an otherwise equivalent private company would be • Find a similar private company that sold recently • Downside: the only commonly available metric is sales, and value is not always clearly tied to sales or even profit • Comparison is only method that is possible if you have no access to the financial statements and appraisals of the assets is comparable companies

9. Comparison to public companies • Yahoo Stock Screener (http://screen.yahoo.com/stocks.html) • Parameters that can be used • Industry (SIC or NAICS) • Sales • Enter relevant info for the target company • SEC.gov company search allows SIC search • If you don’t know the SIC, check http://www.osha.gov/pls/imis/sicsearch.html • If your search turns up no companies, try replacing the right-hand numbers with zero’s: 5261 becomes 5200 • Once you know the company name, look it up on your favorite public company site (e.g. finance.yahoo.com)

10. Comparison considerations • Market Capitalization is one good measure of public company value • Your target company value is probably considerably less, even if otherwise equivalent • Public companies tend to be much larger than their private counterparts • Ratio of annual sales to market cap provides a multiple for the relevant industry • The more examples the better • Read the profile to see if the comparison company is similar in purpose to the target • If the public company has flat or negative earnings, it may still have value

11. Comparison to other private co.s • Business Valuation Resources (www.bvmarketdata.com) • Pratt’s Stats • Database of over 9,500 private company sales from 1990 to present • Deal price ranges from $1 million to $14.4 billion • Updated monthly with about 100 transactions added / month • $595 • Bizcomps • Database of over 9,500 private company sales from 1993 to present • 61% of the companies have gross revenues less than $500K • 18% of the companies have gross revenues over $1 million • $395 • INC. Magazine’s Ultimate Valuation Guide

12. Inc.’s 2008 Valuation Guide Premium Zone Median Sale Price Discount Zone Median Annual Sales

13. Inc.’s 2008 Valuation Guide Median Sale Price Median Annual Sales

14. Inc.’s 2007 Valuation Tables

15. BizStats Rules of Thumb http://www.bizstats.com/reports/valuation-rule-thumb.asp

16. Business Classifieds • Bizbuysell.com • GlobalBX.com

17. Pulling it all together • Company sales are reported to be $20 million • The one classified found for a bookstore supports a high ratio of value to sales • Public company in the same industry has a salesto value ratio of 35% • Inventory is unknown, but classified add suggests a possible inventory to sales ratio of 37.5% • Best guess of inventory: 37.5% x $20 MM = $7.5 MM

18. Alternate Calculations • Using similar public company comparison (35% of sales) • $7 MM • Using Inc. Valuation Guide for retail trade (43% of sales) • $8.6 MM • Using BizStats (15% of sales + inventory) • $7.5 MM Inventory • $3.0 MM 15% of sales • $10.5 MM Total

19. Rating the prospect Households with a net worth of $1M-$10M, 2001 IRS data, published in 2006

20. Rating the prospect • Assume 50% ownership for the prospect who founded the company more than 30 years ago • Ownership stake would be between $5.25 MM (BizStats) and $4.3 MM (Inc. Guide) – conservatively could be $4MM • Per IRS, closely held stock is 8% of net worth – make it 1/10 for easy calculation • 10 x $4 MM = $40 MM estimated net worth • Prospect’s philanthropic capacity could be 2-5% of estimated net worth • 2% x $40 MM = $800,000 • 5% x $40 MM = $2 MM

21. Consolidated resource list • Yahoo! Stock Screener: screen.yahoo.com/stocks.html • BV Resources: www.bvmarketdata.com • Inc. Valuation Guide: www.inc.com/valuation/index.html • BizStats: www.bizstats.com • BizBuySell: bizbuysell.com • GlobalBX: www.globalbx.com • www.lambresearch.com • White Paper www.blackbaud.com/resources/white-papers.aspx

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