Valuation Essentials

Valuation fundamentals

• Valuation theory and framework: Three fundamental approaches Assets

• Earnings

• Market

How do 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 ...

• 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 on 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

• An example to illustrate the importance of positioning your target

• Practical issues with transaction comparables

• Analysis and summary output

• Case Study 3: 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 the 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 qualitative 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

Training Objectives

• 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.

• Participants 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

Training Course Summary

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

It 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 One-Day version of this course can be presented in-house exclusively for your company on a date and time of your choice.  The One-Day version is available to view here .