Valuation Essentials

Valuation fundamentals

• Valuation theory and framework: Three fundamental approaches
  • Assets
  • Earnings
  • Market
• How all methods come back to the present value of future cash flows
• Risk – the key input to valuation
• How risk differs – basic principles
• CAP-M – a framework for assessing risk
  • Risk free rate
  • Specific risk
• Artificial intelligence (AI) – its current applicability to valuation, and its limitations
• Exercise – assessing and comparing the risk free rate across a universe of borrowers

Discounted Cash Flows

• Case Study 1: Valuing a private company whose owner is contemplating a sale
• Focus on the Earnings Method
• Presenting unlevered free cash flows as a basis for business valuation
  • Components of cash flow
  • Tax treatment
• Discounting future cash flows: methodology
• The discounting formula in Excel
• Building a five year discounting model
• Mid-year adjustments
• Calculating the terminal value
  • Perpetuity growth method
  • Realistic inputs
• Sanity checks
  • Accounting for debt
  • Sensitivity grid
  • Implied multiples and growth rates
  • Percentage of value in the terminal period

Calculating the weighted average cost of capital

• Case Study 2: What discount rate did the private company owner use, and how was it calculated?
• Establishing the company’s cost of debt
• Cost of equity: understanding the risk-free rate, the equity risk premium, beta and alpha
• Studies of the ’correct’ equity risk premium
• What beta signifies (and masks)
• Unlevering and relevering the beta
• What goes into alpha
• Using a normalised capital structure
• Applying the calculated WACC to our discounting model
• Exercise: how the market is (implicitly) valuing Nvidia

Introduction to comparables

• Focus on the Market Method
• Introducing valuation techniques based on trading (market) multiples, and on precedent M&A transaction multiples
• What do multiples signify – in what are they rooted?
• Multiples – four key areas to consider ...
• ... and two key sources of data
• What drives differences?
• Exercise (based on a selection of FTSE-100 shares): identifying which companies attract high and low multiples

Linking the theory: how valuation multiples should (over time) align with valuation based on DCF

• Revisiting the components of cash flow
• Worked mathematical illustration with references
• Why values don’t always align in practice
• How to interpret differences

Comparable M&A Transactions (‘CoTrans’)

• Selection of transactions
• Challenges with information gathering and usage
• The value of insight
• Example to illustrate the importance of positioning your target
• Practical issues with transaction comparables
• Analysis and summary output
• Exercise: Choosing the ’best’ comparables for a control transaction in the Building Materials sector

Comparable Quoted Companies (‘CoCos’)

• Screening companies to identify a suitable comparable set
• The breadth of data available
• Issues in assessing the data:
• Cleaning non-recurring items from earnings
• Which period? Historic/ Last Twelve Months/ Current/ Forecast years
• Calendarization issues
• Analysis: Dealing with outliers
• Applying quoted company analysis to private company valuation
• Troubleshooting and checking the output

Applying CoCos and CoTrans together

• Case Study 4: Fair valuation of a soft drinks business
• Context and introduction of client and target business
• For each of CoCos and CoTrans:
  • Take a broad peer group and sift the most appropriate  ’comparables.
  • Identify and analyse outliers, and consider how best to treat them
  • Make qualitiative comparisons
  • Analysis over time
• Public to private discount
• Generate an enterprise valuation analysis based on EV/Sales and EV/EBITDA
• Drawing the results of each approach together
• Conclusion: how to advise the client

Conclusion

• Review of all material, key messages and key learnings
• Revisit case studies as necessary
• Revisiting AI – what it can and (currently) cannot do
• Opportunity for discussion

The trainer has worked on corporate finance and capital markets transactions for over thirty years, holding positions on the client side as well as leading advisory teams.

At the Department of Energy, he was a civil servant involved in the privatisation of British Gas, a global IPO involving a large advisory team. He also spent two years (1990-92) in the Hungarian Government privatisation agency working with many advisory firms, as the changing political environment triggered massive ownership change. He has worked in major investment banks (Swiss Bank Corporation International – now UBS - and Lazard) and also co-founded a successful M&A advisory boutique firm. In 2021 he retired from KPMG, where he spent 13 years in the firm’s global M&A business, based in Scotland.

His experience combines a broad range of M&A and equity transactions in North and Central America, Asia Pacific, and all the major European countries, plus, most recently, in Africa. His courses draw deeply on case studies from transactions he has run, bringing practical examples to set alongside the theory.

• Participants are introduced to the main equity valuation techniques.
• The participants start with an overview of fundamentals, where the intellectual framework and the different methodologies are discussed.
• The participants will then look at the Earnings Method (Discounted Cash Flow -DCF) and specifically at computing the Free Cash Flows and the Weighted Average Cost of Capital (WACC), to understand how valuation by DCF is undertaken.
• Pparticipants will then focus on the Market Method: understanding valuation based on comparable quoted company and comparable M&A transaction multiples, and be introduced to why the market applies different multiples to apparently similar companies.
• Exercises, case studies and worked examples throughout

• If you are looking for a course that’s led by an experienced trainer, you’ve come to the right place. Our trainer is a corporate financier with over 30 years of experience in capital markets and corporate finance valuation advisory work.
• Our trainer’s experience includes the application of all main equity valuation techniques to businesses at all stages of development and in all forms of transaction: growth capital, IPO (Initial Public Offering), M&A and distressed sales.
• Comprehensive material covering all the fundamentals, from basic through intermediate level.
• Step-by-step Excel models illustrating key concepts.
• Delegates are encouraged to bring their own examples of difficult equity valuation challenges to discuss and debate during the session.
• The analysis is key – but valuation is an art as much as a science – the areas where judgement is paramount will be made clear.

This course is a ‘must know’ for:

• Practitioners new to M&A (Mergers and Acquisitions) and valuation, seeking a closer understanding of the principles and practice and how the principal methods are applied in practice.
• Family business advisors working with SME owners (small and medium-sized enterprises) who are considering a sale, but lack an understanding of basic equity valuation techniques.

This course is also a ‘nice to know’ for:

• Legal and other advisors seeking a greater understanding of the financial advisor’s role concerning equity valuation.

This course is a practical guide for anyone who wants to learn the initial steps to valuing a business.

It is is a practical workshop by an experienced trainer that teaches the most common methodologies. Expect to learn discounted cash flows, comparable transactions and comparable quoted companies multiples, concluding with a case study that applies all methods to the divisions of a large and diverse business.

The emphasis is on practical application to real-world valuations throughout, combined with a straightforward explanation of the underlying rationale.

The half day format allows participants to accelerate their learning and enhance their valuation skills in an efficient and engaging session.

Specifically the session covers:

• Business valuation techniques, in the context of mergers, acquisitions and capital markets.
• The most common methodologies and the underlying theory.
• The practicalities of valuation by way of discounted cash flow and through the use of comparables.
• Illustrated with simple but rigorous exercises and demonstrations.

Case studies based on real corporate finance situations.  

An extended 1-day version of this course can be presented in-house exclusively for your company on a date and time of your choice. Click here to view the 1-day version