Analysing, Planning and Valuing Private Firms

This book aims to provide a framework for the valuation of private corporations. Starting from the analysis of financial statements to understand where value comes from, to the appli-cation of valuation methods, this book tries to provide a list of tools and techniques to solve practical application drawbacks. Regarding the financial statement analysis, despite the consolidated use of financial ratios and scores, sometimes it is difficult to provide a complete picture of the company’s economic, financial, and strategic dynamics. The process of valuing private companies is not different from the process of valuing public companies. The present value is computed by discounting future cash flows with a proper rate that reflects the riskiness of the cash flows. However, when applying valuation techniques to private companies, there are two standard problems to overcome: the financial statements for private firms are likely to go back fewer years and have less detail; there is no market value for either debt or equity. In this book, we try to over-come these two criticalities by proposing some approaches to (1) forecast revenues, margins, and cash flows; (2) estimate the cost of capital for private corporations. Then we also provide a framework on how to use relative valuation techniques (multiple) that despite their simplicity hide some pitfalls in the application.