I recently attended a one day course by MBE Education on Capital Raising and Exit Strategies. It followed the standard pattern: the course was cheap, provides enough information to inspire attendees, but not enough specific information for them to really do anything. At the end of the day, they offer the one-time opportunity to take the real course at a expensive price. This time the real course was $6,000 per month for 3 months. Wow.
Anyway, there were a couple of good points raised that I’d never heard before:
- For capital raising and exits, the most common valuation technique (in Australia at least) is simply a multiple of this year’s or next year’s profit (EBITDA). Their key observation though was that many private businesses deliberately take profit out of their company each year to minimise their tax liability. However lower profit means lower valuation, so these techniques to minimise tax now may make it harder to negotiate a higher valuation later.
- When a public listed company acquires a private company they instantly lift the valuation multiple of the investment from the private company’s multiple (say 4x) to their actual trading multiple (say 10x). This has a few important consequences:
- acquisition of private companies can be very attractive to publicly listed companies because of the immediate lift in value of the acquisition. It’s a form of arbitrage that instantly creates value. It works because public listed companies (here at least) trade on average at much higher multiples than private companies can be valued at.
- a private company can use this knowledge as part of the negotiation of their valuation.