Comments on: Private Company Valuation, Part 1: Are You in the Meth Business or the Money Business?

By: M&I - Brian

M&I - Brian — Mon, 03 Jun 2024 17:39:47 +0000

In reply to Ethan Brooks. FCFF is best for all companies. FCFE has many flaws (do a search for Levered FCF to see).

By: M&I - Brian

M&I - Brian — Mon, 03 Jun 2024 17:39:18 +0000

In reply to Ethan Brooks. This looks like an error in the file. The Sum of PVs of FCF should only go through Year 10 in this case since the business stops operating then.

By: Ethan Brooks

Ethan Brooks — Tue, 28 May 2024 17:13:36 +0000

Hi Brian,

Is it okay if we use FCFE to value private companies? Is it more common to use FCFF to value private companies?

Thank you very much.

By: Ethan Brooks

Ethan Brooks — Tue, 28 May 2024 17:10:11 +0000

Hi Brian,

I have a question about estimating terminal value using the liquidation value method.

In the example of Capital Capable Media LLC, why was the terminal value calculated as the sum of the liquidation value in year 10 and the cumulative FCF from year 11 to year 15?

Given the projection period of year 6 to year 15, why can’t we use the liquidation value in year 15 as the terminal value and we project balance sheet to year 15 to get that liquidation value?

Thank you very much!

By: M&I - Brian

M&I - Brian — Fri, 30 Apr 2021 18:09:20 +0000

In reply to walid elrayes. The first part is the mid-year convention. It is not necessary and can be dropped if you want. The mid-year convention just says that cash flows arrive, on average, midway through each year rather than at the end, to get a slightly more accurate measure of the PV. But it makes a marginal difference at best and can be ignored.

By: walid elrayes

walid elrayes — Tue, 27 Apr 2021 19:44:08 +0000

Hi Brian,
It very insightful and helpful article, thanks you for sharing.
However, I have 2 question about the calculations in the excel file, hope you could explain to me.
1- In Terminal Value – Perpetuity Growth Method: when you calculated the Baseline Terminal Value you multiplied the normal TV by “ *(1+N112)^0.5 “ , would you explain that
2- In calculations of “PV of FCF:” you used “Mid-Year” and raised to the power of it. Would you explain this ?
Thank you in advance
Walid

By: M&I - Brian

M&I - Brian — Sun, 26 Apr 2020 03:23:50 +0000

In reply to YING HU. You can't, it's arbitrary. People use something in that range depending on how close the company is to a larger public company.

By: YING HU

YING HU — Thu, 23 Apr 2020 21:14:43 +0000

Hi Brian,

I am confused about “you almost always apply a private company or “illiquidity” discount, which often ranges from 10% to 30%, to these multiples.” I am not sure how to get illiquidity discount number, how can I get this information or calculate this number? Thank you!

By: M&I - Brian

M&I - Brian — Fri, 23 Aug 2019 11:45:33 +0000

In reply to Jacob.

Debt principal repayments do not factor into Unlevered FCF. That is the whole point of using an “Unlevered” metric, you ignore capital structure.

If the company’s capital structure changes significantly over time (e.g., 30% Debt to 50% Debt… not 49% to 50%), you might adjust WACC or up or down by the end of the forecast period and use a cumulative discount factor rather than one number for the discounting.

By: Jacob

Jacob — Wed, 21 Aug 2019 07:27:06 +0000

Hi Brian,

Thanks for sharing you insight into private company valuation!

Have a question though. Assume you made principal repayment for your debt each year, and while the Unlevered Free Cash Flow wouldn’t be impacted, what about your WACC? Assuming the Cost of Debt is still below Cost of Equity, shouldn’t WACC goes up and then EV goes down?

And would public company give similar rationale like private company given the debt repayment? Thanks