After Twelve Years Your Business Is Wildly Successful With

After Twelve 12 Years Your Business Is Wildly Successful With Multi

After twelve (12) years, your business is wildly successful with multiple locations throughout the region. You are now ready to think really big. You want to purchase a huge competitor. (Note: You determine whether the competitor is a privately or publicly held company.) To expand, you will need additional capital from the debt or equity market, or both. Use one (1) of the valuation techniques identified in Chapters 10 and 11 to calculate the value of the competitor you wish to purchase.

Paper For Above instruction

Introduction

The process of evaluating a potential acquisition is a critical step in strategic business expansion, especially when considering the purchase of a large competitor. Proper valuation ensures that the acquiring company makes informed decisions, minimizes risks, and maximizes return on investment. This paper explores one of the valuation techniques outlined in Chapters 10 and 11—specifically, the Discounted Cash Flow (DCF) method—to ascertain the value of a target competitor, whether privately or publicly held, thus facilitating an informed acquisition decision.

Overview of Valuation Techniques

Valuation techniques serve as essential tools for estimating the worth of a business. Among these, the Discounted Cash Flow (DCF) method is renowned for its focus on future cash flows, discounted back to their present value, accounting for the time value of money. Other methods covered in Chapters 10 and 11 include comparable company analysis and precedent transaction analysis. However, for this scenario, the DCF method offers a comprehensive evaluation of the target company's intrinsic value based on its projected financial performance.

Application of the Discounted Cash Flow Method

The DCF method involves several steps: projecting the company's future cash flows, determining an appropriate discount rate, and calculating the present value of these cash flows. To perform this valuation, accurate financial data such as revenue growth rates, operating margins, capital expenditures, and working capital needs are essential. For illustration, assume the target company has stable cash flows, with projections indicating a five-year growth rate of 5%, and a perpetual growth rate of 2% thereafter.

The formula used is:

PV = ∑ (CF_t / (1 + r)^t) + (Terminal Value / (1 + r)^n)

where CF_t is the cash flow in year t, r is the discount rate, and n is the final projection year.

The discount rate, often based on the company's weighted average cost of capital (WACC), reflects the riskiness of the cash flows. Suppose the WACC is calculated at 8%. Using these parameters, the present value of projected cash flows and the terminal value are summed to determine the overall valuation.

Calculating the Value of the Target Company

Assuming the projected free cash flows for the next five years are as follows: Year 1: $10 million, Year 2: $10.5 million, Year 3: $11 million, Year 4: $11.5 million, Year 5: $12 million. The terminal value reflects the perpetuity growth rate of 2%, calculated as:

Terminal Value = (CF in Year 5 × (1 + g)) / (r - g) = ($12 million × 1.02) / (0.08 - 0.02) = $204 million.

Discounting these cash flows and the terminal value back to the present yields an estimated enterprise value of approximately $181 million. This valuation assists in negotiations and strategic planning for the acquisition.

Considerations for Private vs. Public Targets

Valuation methods differ slightly depending on whether the target is privately held or publicly traded. For private companies, additional adjustments for lack of marketability and transparency are necessary, often resulting in a lower valuation compared to public counterparts. Public companies’ market values are readily available, but must still be adjusted for company-specific risks and potential market volatility.

Conclusion

Using the Discounted Cash Flow method provides a robust framework for valuing the competitor targeted for acquisition. It focuses on the company's intrinsic cash-generating potential, accounting for future growth and risks. This thorough valuation process enables strategic decision-making, helping the acquiring business to determine a fair purchase price, structure the deal effectively, and plan for the necessary capital infusion from debt or equity markets.

References

• Brealey, R., Myers, S., Marcus, A. (2020). Principles of Corporate Finance. McGraw-Hill Education.
• Damodaran, A. (2012). Investment Valuation: Tools and Techniques for Determining the Value of Any Asset. Wiley Finance.
• Graham, B., & Dodd, D. (2008). Security Analysis: Sixth Edition. McGraw-Hill Education.
• Palepu, K. G., & Healy, P. M. (2013). Business Analysis and Valuation: Using Financial Statements. Cengage Learning.
• Ross, S. A., Westerfield, R. W., Jaffe, J. (2021). Corporate Finance. McGraw-Hill Education.
• Valuation.org. (2023). Discounted Cash Flow (DCF) Method. Retrieved from https://valuation.org/dcf
• Investopedia. (2023). Discounted Cash Flow (DCF). Retrieved from https://www.investopedia.com/terms/d/dcf.asp
• Damodaran Online. (2023). Valuation Approaches and Metrics. Retrieved from http://pages.stern.nyu.edu/~adamodar
• Morningstar. (2023). Market Valuation Tools. Retrieved from https://www.morningstar.com
• Corporate Finance Institute. (2023). How to Calculate Terminal Value. Retrieved from https://corporatefinanceinstitute.com