On October 18, 2007, the Central Valley Fund, in conjunction with the Lyles Center for Entrepreneurship at Fresno State, the Fresno Chamber of Commerce, and the Central Valley Business Incubator, hosted the 2nd annual Central Valley Venture Conference.  The event was sold out one week ahead of time and speakers included eBay co-founder and former CA State Controller Steve Westly, West Coast Managing Director for $60B investment manager Hamilton Lane Paul Yett, a panel of successful Central Valley CEOs, and CalPERS Central Valley Board Member Tony Oliviera.  Additionally, there was a panel discussion for business owners on building durable capital structures for middle market companies.  At the end of the day, eight Central Valley business owners seeking capital presented to a panel of private equity professionals.  Best of show was won by Pure Sense, a Fresno-based irrigation company.  The Central Valley Fund is proud to say that 50% of past presenting companies have successfully raised the capital they were seeking as a direct result of conference participation.

One of the most common points of dissension between two sides in a transaction negotiation is business valuation - How much is the company worth?  The main reason for this disagreement is that there are many different ways to value a business.  The most common methods for valuation are discounted cash flows, market comparable multiples, and liquidation value.

Discounted Cash Flows ("DCF")

DCF discounts a company's estimated future cash flows by its cost of capital or expected return on equity to determine the current value of the company.  Most valuation analysis is done with 5-7 year projections because of the difficulty in projecting cash flows much further into the future.  As a result of this short time frame, the  valuation of the cash flows in the later years (otherwise referred to as the "terminal" years, or the "Terminal Value") becomes very important in determining the current value of the company.  It is also the key point of contention as there are different ways to come up with a Terminal Value estimate - assume cash flow remains stable in terminal years, assume cash flows grow at a steady rate in perpetuity, assume net income remains constant in perpetuity,  or use a multiple of future EBITDA.  There is no right or wrong answer.

Market Comps

With large, publicly-traded companies, it is easy to look at two companies in the same industry and show that the market multiple at which they trade is relatively close to one another, all else being equal.  However, this becomes increasingly difficult with privately-owned companies and smaller companies because there is not an active market for their securities.  One of the most common mistakes made in valuations is using a publicly-traded company's multiple to value a small privately-owned company in the same industry.  Doing so ignores the additional risk typically associated with smaller companies and the lack of liquidity associated with privately-owned companies.  In an industry where the average publicly-traded company trades for 10x EBITDA, a small privately-owned company may only garner a valuation of 4x EBITDA.

Liquidation Value

This methodology seeks to answer the following question: How much would the company receive if it sold all of its assets today?  While informative in a turnaround and/or re-structuring situation, this method is not very practical as sellers want some recognition for the near-term growth potential and Terminal Value of their business, thus requiring a goodwill component to be added to the Liquidation Value, creating a higher overall transaction price.