Euromoney Learning Solutions

Early Stage, Tech & Difficult Company Valuation

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About the course

Learn essential methods to help combat the intricacies of difficult valuations

Traditional valuation approaches for non-financial businesses focus on the use of multiples or cash flow based analysis. What these techniques assume is a stability and a risk profile that is not found in the more difficult types of business to value. This leads to errors in valuation that traditional valuation tools struggle correct, indeed errors that analysts are sometimes unaware of. Assumptions about risk and profitability need to be adapted when dealing with these types of business and this advanced valuation and modelling course looks at the valuation approaches to be taken to enable participants to value companies and sectors which cannot be valued using traditional valuation techniques.

Where analysts struggle to value business correctly is at the early growth and start up stage (the Facebook stage), which would cover sectors such as technology, biotechnology and any early funding stage business. Traditional valuation tools struggle to estimate profitability (what size will the eventual market be?) and risk (will the company survive and how does risk change if it does?) The key challenges associated with such companies are discussed, the problems with traditional valuation approaches and the best valuation approach considered. Valuing rapidly growing (early-stage) companies which, depending on the geographic location, may cover technology, media, telecoms and pharmaceutical sectors. Here risk is again a problem area, but the rate and timing of the peak in growth becomes a key issue (the Apple stage).

As well as discussed some of the current issues with traditional cash flow and multiple based valuation approaches the course will cover more advanced valuation approaches such as decisions trees, simulations, scenario analysis and real option valuation. As such the course provides an “analytic toolkit” for anyone looking to value almost any type of non-financial company across a range of sectors and lifecycle stages.

Examples are provided to illustrate each issue.

Overview of valuation approaches:

  • Intrinsic valuation – traditional cash flow techniques
  • Relative valuation – multiple based analysis
  • Probabilistic valuation – scenario analysis, decision trees and simulations
  • Real options valuation – additional value created through optionality

Other valuation issues:

  • Assessing risk – the risky risk free rate and other current valuation issues
  • The economic cycle – incorporating macro-economic factors into a valuation

Agenda

Overview of valuation approaches

  • Intrinsic valuation – traditional cash flow techniques
  • Relative valuation – multiple based analysis
  • Probabilistic valuation – scenario analysis, decision trees and simulations
  • Real options valuation – additional value created through optionality

Other valuation issues

  • Assessing risk – the risky risk free rate and other current valuation issues
  • The economic cycle – incorporating macro-economic factors into a valuation   Valuing early stage and start-up companies and sectors

A life cycle view of start-up companies

  • Start-up companies in context

Characteristics of young companies and sectors

  • The key challenges with start-up companies
  • Visibility – a key valuation challenge

Valuation issues – intrinsic value

  • How to value existing assets in a start-up
  • Cash burn and the effect on existing assets
  • The future of the business – high growth and growth phases
  • Assessing growth rates - the key component of value
  • Adjusting risk for small fast growing businesses
  • Discount rates for pure equity financed businesses
  • When to calculate terminal value
  • Reducing the dependence on terminal value
  • Value of equity claims
    • Assessing equity claims in a early stage business

Valuation issues – relative valuation

  • Problems with start-up multiple analysis
  • Determining the starting point – revenue multiples vs profitability multiples
  • Which year? – Determining stability for multiple calculation and techniques for “normalising” multiples vs the sector

Valuing a start-up or early stage business in practice

  • Main errors made in valuing early stage businesses
  • Macro vs micro analysis
  • Product success and market share
  • Bottom up approach to a valuatio
    • Capacity capability
  • Estimating and using different discount rate
    • The use of phased discount rate
    • Discount rates as maturity approaches
  • Ensuring consistency in a valuation
  • Private and public multiples
  • Option to expand valuatio
    • How optionality affects valuation

Valuing rapid growth companies and sectors

A life cycle view of rapid growth companies

  • The rapid growth company in context

Characteristics of growth companies and sectors

  • How are growth companies different?

Valuation issues – intrinsic value

  • How historic numbers are misleading
  • How asset life may develop in the high growth phase
  • How existing assets differ in a rapid growth business
  • Where the bulk of value is created by a rapid growth company – the growth phase
  • Capital intensity and the rapid growth business
  • The development of risk during the growth phase
  • The stage at which a terminal value should be calculated for a rapid growth business

Value of equity claims

  • The differing equity claims in a rapid growth business
  • Participation by different equity holders

Valuation issues – relative valuation

  • Peer groups
  • Finding similar growth businesses – different sectors?
  • Risk measures – adapting a multiple analysis for risk

Valuing a growth business in practice

  • Main errors made in valuing growth businesses
  • Dealing with immature markets
  • Assessing product cycles
  • Ability to execute – the key driver

Trust the experts

Mike Corless

The Course Instructor is a qualified chartered accountant, who began his career as an auditor for Grant Thornton International. He moved to Ernst & Young as a senior manager in the corporate advisory team in 1986, working on major acquisitions, disposals, IPOs and insolvency/restructuring tra...

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