Private Market Valuation

[Hershey]

I am interested in learning about valuation of small (<$40m in sales) of construction subcontracting companies.  Target company has current asset equity in business beyond working capital needs.  Does a fair valuation of the target company include a multiple of earnings, plus equity in business, or only multiple of earnings?  My thought is that the business is worth a multiple of future earnings, plus current equity not needed for ongoing functioning of business.  Does this make sense?  Merely paying a multiple of earnings could in essence be a purchase only slightly above existing book.  Hopefully, I wrote this question in a way that is clear.

Thanks,

[jschembs]

Typically valued based on book value.

[Packer16]

You need to provide more details like the nature of the non-operating asset and the profitable (and expected profitability of the business).  PM if you would like to discuss.

 

Packer

[Hershey]

Thanks.  Before going into greater detail, if a purchase is made based on book value, isn't the purchase in essence an orderly liquidation of the target company that the purchaser can fund through on going operations?

[Packer16]

Not necessarily as the value may be less than if you cannot liquidate the assets for BV that is why it is important to look at the details. Typically, you take the greater of liquidation value (marked to market) or an earnings capitalization plus non-operating assets as the value then adjusted for the size of the stake you are purchasing.

 

Packer