Startup Valuation

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Business Valuation for Start ups & Young Growth Companies

Business Valuation for Start ups & Young

Growth Companies

Presented by

CA Viswanathan ,

FCA ,ACS, Registered Valuer (Securities and

Financial Assets)

Contact : + 91 99622 60333

Website : www.virtualauditor.in


Please Remember . .(Disclaimer)

This is not legal advice—only a discussion on types of valuation

and its what drives the valuation


What is Valuation?

Valuation an estimation of the worth of something be

it an Asset (Land ,Machinery) , Value of Business

( used for start up valuation), especially one carried out by a

professional valuers.

2. Companies, like human beings, have a life cycle and a firm’s

valuation should be able to reflect its position in the lifecycle , first step being

Company registration and getting all taxation registration i.e GST Registration


Business Valuation

Imagine you've put Rs100,000 into starting a new

business, and you've been growing it for the last year.

You think you have a viable product, and initial

customer tests back up your claim. You're ready for

venture capital funding.

How much is your company worth right now? How

much is your equity worth?

For Online Business Valuation contact Virtual Auditor @

9962260333

Lets Find out


Business Valuation contd.

Your Accountant will tell you will tell you that your company is

worth the value of its assets, based on the initial cost of their

acquisition, plus you cash on hand

But is that really the value? If you were to sell the company,

you'd be selling it as a company, with a future and a customer

base and an idea that has value.

Startup Valuation more so referred as Company valuation has

to done only be Registered valuers


$ Revenues/

Earnings

The Lightbulb (Idea) Moment

From idea to business

The Bar Mitzvah

The Scaling up Test

The Midlife Crisis

The End Game

Corporate Life Cycle

Revenues

Earnings

(Profits)

Time

Growth stage

Stage 1

Start-up

Stage 2

Young Growth

Stage 3:

High Growth

Stage 4 Stage 5

Mature Growth Mature Stable

Stage 6

Decline

Description

Have an idea for Create a business Build the Grow your Defend your Scale down

a business that model that business, business, business from your business

meets an unmet converts ideas converting shifting from new as market

need in the

market.

into potential

revenues &

earnings

potential into

revenues.

losses to

profits

competitors &

find new

markets

shrinks.


Pivot and adopt new Technology :

Rogers Technology Adoption Curve


7 STEP BUSINESS FINANCE

FRAME WORK


FINANCAL DRIVERS

Identify How much can you can Invest in early

stages


Business Valuation

approaches


Pure Negotiation Approach

lets assume your fund requirement is Rs 1.35Mn,

this are decision that you need to take with equity

dilution


Pure Negotiation Approach

Lets assume that you are willing to give 25% equity of your

company , the value of the Company will be Rs. 5.4 Mn



DISCOUNTED FREE CASH FLOW METHOD

METHOD


Pre Money and Post Money

Valuation

Pre Money Valuation:

Pre-money valuation is equal to the price paid per

share in the financing round multiplied by the

number of shares outstanding before the financing

event


Pre Money and Post Money

Valuation

Post money Valuation Definition:

In A Private Company Valuation , Pre-money valuation is

equal to the price paid per share in the financing round

multiplied by the number of shares outstanding after the

financing event


Understanding Pre & Post

Money Valuation

Post Money Valuation = Value of the Company Before the

Investment (Pre money)+ Amount of Investment

Investor 1 Investor 2

Offer Rs 25000 for 20% of business Rs 1,00,000 for 50% of Business

Post Money Valuation Rs 25000/20% = 125000 Rs 100000/50% = 200000

Pre Money Valuation Rs 125000 - Rs 25000 = Rs 10000 Rs 200000- Rs 100000 = Rs 100000


Estimating your firm’s FCFF

(Free Cash flow to Firm)

Estimating your Free Cash flow to firm

Step 1: Estimate EBIT (Earnings Before Interest & Taxes) * (1-t)

Step 2: Add : Depreciation

Step 3: Add: Capital Expenditures

Step 4: Add : Non Cash Changes in Working Capital

Total of all the above will give your FCFF


ESTIMATING COST OF EQUITY

You have started you company with intention of

retunes on you capital that you have employed ,

bank FD has 5% Return where as return on you

business will be 25% to 30 % who is this calculated ?

Cost of equity = Rf (Risk free rate of return ) + Beta ×

(market rate of return – risk free rate of return)

Beta is the risk factor

The above rate shall for discounting the future cash

flows , assuming the company has no debt


Estimating the Risk

1. Risk, in traditional terms, is viewed as a ‘negative’.

Webster’s dictionary, for instance, defines risk as “exposing

to danger or hazard”. The Chinese symbols for risk,

reproduced below, give a much better description of risk

The first symbol is the symbol for “danger”, while the second is

the symbol for “opportunity”, making risk a mix of danger and

opportunity

Source : Aswath Damodaran


Estimating Terminal Value

Terminal Value the value of the firm in perpetuity ( or the

exit/sale date)

It assess the cash flow of the company till the life time of the

company

Its given by the formula mentioned below


Estimating Terminal Value

Terminal Value the value of the firm in perpetuity ( or the

exit/sale date)

It assess the cash flow of the company till the life time of

the company

Its given by the formula mentioned below


Sample Discounted Cash Flow

Cost of Capital 21.0%

Growth 2.0%

1.0 2.0 3.0 4.0 5.0

Rs in thousands

Actual

FY19 FY20

Forecast Forecast

FY21

Forecast

FY22

Forecast

FY23

Forecast

Note

Free Cash flow 935 484 1,045 1,554 1,810

Discount factor 0.83 0.68 0.56 0.47 0.39

Present value of UFCF 773 331 590 725 698

DCF Valuation

PV of Cash flows 3,116.6

Continuing value 9,718.7

PV of Continuing value 3,747.0

Enterprise value 6,863.6

() Financial liabilities (208.7)

Cash 8.0

Equity value 6,662.8


Total Estimated Future Revenue

Amount in Crore

FY

3/20

FY

3/21

FY

3/22

FY

3/23

FY

3/24

Central rights income 352.3 352.3 352.3 352.3 352.3

Sponsorship income (1) 85.4 93.9 103.3 113.7 125.0

Gate collection income 27.4 35.0 42.0 50.4 60.5

Franchise income from 39.6 39.6 39.6 39.6 39.6

Sponsors

Revenue from

1.0 1.2 1.4 1.7 2.1

merchandising (2)

Total Revenue 505.7 522.0 538.6 557.6 579.4


Total Estimated Future

Expenses

Amount in Crore FY3/20 FY3/21 FY3/22 FY3/23 FY3/24

Cost of materials 0.5 0.5 0.6 0.8 0.9

EmployeeBenefits 1.1 1.2 1.4 1.5 1.6

Players Fees 71.8 75.4 79.2 83.1 87.3

Support Staff fees 11.3 12.4 13.6 15.0 16.5

Players Expenses 0.4 0.5 0.5 0.6 0.6

Support Staff Expenses 0.2 0.3 0.3 0.3 0.3

Consultancy fee 0.2 0.2 0.3 0.3 0.3

Repairs &Maintenance 0.0 0.0 0.0 0.0 0.0

Office Maintenance 1.1 1.2 1.4 1.5 1.7

Compliments 9.0 9.9 10.9 12.0 13.2

TournamentExpenditure 7.5 8.3 9.1 10.0 11.0

Vehicle HireCharges 0.0 0.0 0.0 0.0 0.0

Miscellaneous Expenses 8.6 9.5 10.4 11.5 12.6

Franchisee Fees 0.1 0.1 0.1 0.1 0.1

Sales PromotionExpenses 1.3 1.5 1.6 1.8 2.0

Canvassing Commission 1.3 1.5 1.6 1.8 1.9

Rentexpenses 2.3 2.4 2.5 2.6 2.8

Insurance 0.1 0.1 0.2 0.2 0.2

Rates andtaxes 0.2 0.3 0.3 0.3 0.3

Telephone postage 0.0 0.0 0.1 0.1 0.1

Printing stationery 0.0 0.0 0.0 0.0 0.0

Travelling exp 2.7 2.9 3.2 3.6 3.9

Legal professional charges 0.3 0.3 0.3 0.3 0.3

Bank charges 0.0 0.0 0.1 0.1 0.1

Payment for audit services 0.0 0.0 0.0 0.0 0.0

Total 120.2 128.6 137.5 147.3 157.8

Notes

1. Cost of Materials assumed to be 43% of the revenue from merchandising

2. All other expenses is assumed to grow at certain cost inflation by case to case


Estimated Income Statement/Profit & Loss

Account

Amount in Crore FY 3/20 FY 3/21 FY 3/22 FY 3/23 FY 3/24

Earnings bef Interest & Tax 385.5 393.4 401.1 410.4 421.7

(EBIT)

Finance Cost (8% on Rs 65 5.2 5.2 5.2 5.2 5.2

crore)

Earnings bef Tax (EBT 380.3 388.2 395.9 405.2 416.5

Tax @ 33.6% 127.8 130.4 133.0 136.1 139.9

Net Income 252.5 257.8 262.9 269.0 276.6

Note

1. Optionally convertible debentures of Rs 65 crore is assumed to be retained as debt forever.


Estimated Free Cash Flow to Equity

(FCFE)

Amount in Crore FY 3/20 FY 3/21 FY 3/22 FY 3/23 FY 3/24

Net Income 252.

5

257.

8

262.9 269.

0

276.

6

Depreciation (1) - - - - -

Changes in working capital(2) (101.1) (104.4) (107.7) (111.5) (115.9)

Capital Expenditure (3) (10.0) (11.0) (12.1) (13.3) (14.6)

Debt raised / (repaid) (4) - - - - -

Free Cash Flow to Equity(FCFE) 141.

4

142.

4

143.0 144.

2

146.

0


Estimated Cost of Equity (Ke)

for ABC Ltd

Implied Equity Risk Premium (1) 7.412%

Risk Free Rate (10 year Govt of India bond 7.409%

yield)

Beta for Abc(2) 1.24

Ke 16.60%


Discounted Cash Flow (DCF) valuation

of ABC

Amount in Crore

FY

3/19

FY

3/20

FY

3/21

FY

3/22

FY

3/23

Free Cash Flow to Equity

141.4 142.4 143.0 144.2 146.0

(FCFE)

Terminal Cash Flow 1,321.7

Terminal Growth in Cash 5.00%

Flow

Ke 16.60% 0.86 0.74 0.63 0.54 0.46

Net Present Value (NPV) 1,075 121.2 104.7 90.2 78.0 681.0

.2

Rs

155.47

million

Notes

1. Terminal Growth Rate - 5% terminal growth is assumed given the growth


Thank You.

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2. www.virtulauditor.in

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