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Need Help With Valuation
Old 02-06-2006, 12:08 PM   #1
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Need Help With Valuation

I need some idea to determine the value of a potential investment. It has been a closely held company for about 10 years. I have yearly information concerning gross sales, costs, net sales, debt, interest payments, etc.
How would I go about taking this information and calculating a value of the company adn potential future value - it is a small generic pharmaceutical company

Thanks
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Re: Need Help With Valuation
Old 02-06-2006, 12:32 PM   #2
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Re: Need Help With Valuation

The Appraisal Institute publishes several good books on the appraisal of Real Estate. One of the approaches is the Income approach. There are also some good books on Business Valuation. Quick and dirty, you can take the net income before taxes and divide it by a rate. That is where the expert comes in. What rate? 10! Ok so it is not always 10, but for a quick and dirty 10 works. In reality you have to determine the risk of the income stream continuing. The more the risk the higher the number. As I said, in Real Estate it generally hovers around 10. (I am going to hear from the appraisers out there!) This method treats to property like a bond, ie if you want a 100 a year you need a $1,000 bond at 10%.

The other way to do it is a discounted cash flow. Once more you are getting at the net income and discounting it at some rate. A safe rate, the rate of treasuries would not seem practical, neither would a highly speculative rate if the company is up and running with a good track record. I personaly think this is a better way but involves more spreadsheeting than one is normaly prepaired to do.

So, whats my answer. I would treat the income as just that. How much risk is involved in order for me to get this income? How long will it last? Will there be a residual value? Am I going to have to put in 'Management' time. If so, will I get paid for it, or does it come out of the net? Not sure I gave you the answer you are looking for, but I would start at the Library.
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Re: Need Help With Valuation
Old 02-06-2006, 12:53 PM   #3
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Re: Need Help With Valuation

To add, book value can also be used to calculate the value of a business. Presumably, the generic pharma concern you are talking about has a good bit of assets. Not sure what kind of debt load they have. Valuation based on book value is done by multiplying the net worth times some multiplier (equal to or greater than 1, but usually not more than 2-3 times book value, especially in a capital intensive manufacturing industry).

The small company I work for retains a Business valuation consultant to value our business annually. They use a weighted average of the valuations obtained from the book value method, discounted cash flow method and the earnings method. The weighting given to each method presumably varies by industry, size, structure, etc.

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Re: Need Help With Valuation
Old 02-06-2006, 02:11 PM   #4
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Re: Need Help With Valuation

There are rules of thumb for just about any kind of business. I used to have several in my head, but
all lost for lack of use. Don't recommend you make a
big investment based on a SWAG, of course. But, it would be interesting to know if there is a ROT, just
for curiosity. For any kind of manufacturing biz, I always started with liquidation value and worked up from there if necessary.

JG
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Re: Need Help With Valuation
Old 02-06-2006, 02:24 PM   #5
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Re: Need Help With Valuation

Take EBITA (earning before interest taxes, appreciation) and multiply it by 5, 6, or 7, depending on the ability to grow the revenue. The higher the growth potential, the higher the number.
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Re: Need Help With Valuation
Old 02-07-2006, 05:33 AM   #6
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Re: Need Help With Valuation

Thanks for the help.

MrGalt2U: What is SWAT and ROT?
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