Introduction
Making investments in private companies can be a viable option to reduce financial risk and diversify investments. Investing in these businesses can provide higher returns compared to traditional investments like mutual funds. However, the valuation of these investments poses a number of challenges when done in Excel.
Overview of private company investments
When properly evaluated and implemented, investing in private companies can be financially rewarding. This is because private companies are generally less mature and are yet to go public. This fact brings with it a higher potential for growth, as well as the ability to capitalize on business opportunities that more experienced and established public companies may not be able to cash in on. These investments can also be less volatile than those in stocks because their smaller size and limited public disclosure make them less susceptible to market pressures.
Challenges of valuing these investments in Excel
- Valuing private company investments is often difficult due to a lack of data. Private companies are not typically required to report as much information as publically-traded companies, which objectively inform market values.
- The collection, inputting and analysis of this data in Excel can be a time consuming process. This makes it difficult to accurately determine the risk and potential return of any individual investment.
- The subjective nature of private company investments means traditional calculations may not accurately represent the inherent value of these investments. Financial analysis in Excel may not pick up the full value of the investment which can lead to incorrect conclusions.
Key Takeaways
- Valuing private company investments is difficult due to a lack of data.
- The collection, inputting and analysis of data in Excel is a time consuming process.
- Traditional calculations may not accurately represent the value of private company investments.
- Understand proper data evaluation and correct calculations to accurately determine risk and potential return of investments.
Characteristics of Private Company Investments
When it comes to valuing investments in private companies, the challenge is often greater than valuing those of publicly traded companies. This is because it’s often difficult to find data or financial information specific to the company being valued. Here we’ll look at some of the key features of private company investments that make them more difficult to value.
Lack of Historical Data
In order to come up with an accurate valuation, typically investors must have access to recent performance history. That way, they can use financial metrics such as revenue, profits and costs to better understand the company’s future potential. But gathering that kind of data can be tricky when it comes to private companies. Often information regarding a private company’s past performance or financial health is not available, or is limited to a few key indicators.
Limited Information on Financials
Another issue is that the financial information that is revealed about private companies is often quite limited. This makes it much more difficult for investors to get an accurate assessment of the company’s potential. For example, it’s often difficult to get an accurate picture of the company’s cash flow, or to understand what its ongoing liabilities might be. This means that investors need to be creative when it comes to valuing private companies, as they often rely on more subjective data points to do so.
Low Liquidity
Finally, private company investments typically offer much lower liquidity compared to publicly traded companies. This means that it can be significantly harder to find buyers or sellers for a given stake in a private company, particularly if it’s not broadly known or well-established. This can be a major impediment in trying to quickly or easily value private companies, as buyers and sellers may not have any real information about the company itself, which can make valuing it much more difficult.
Reasons to Value Investments
Investors may want to value a private company’s investments for a variety of reasons. These reasons can range from wanting to prepare a business for sale or merger to providing information to potential investors.
For Sale and Mergers
One of the main reasons to value a company’s investments is in preparation for a merger or sale of the business. This can help the company to establish a baseline for negotiations and decide on a fair price for any potential buyers.
To Provide Investors with Information
Valuing investments can also help to provide potential investors with important information. This can include both information about the company’s current performance and any potential upside that the investment may offer.
To Obtain Investment Capital
Valuing a company’s investments can also be useful when seeking new investment capital. Potential investors may want to research a company to decide whether the investment is a good fit, and valuing the investments can help to provide key insight into the return on investment they may expect.
Alternative Valuation Methods
Valuing private company investments can be difficult due to the lack of publicly-available information for analysis. Traditionally, the most common methods for valuing private companies (such as Comparable Public Company Analysis, Precedent Transactions Analysis, and Discounted Cash Flow Analysis) rely on publicly-available information. Hence, it is necessary to adjust such models to use alternative, but reasonably reliable methods.
Industry Multiples
One such alternative method is the use of industry multiples. In this method, multiples such as EV/EBITDA and EV/Revenue are used to determine the value of a company. The multiples are determined based on publicly-available information on comparable companies within the same industry. The adjustable factors such as risk and performance are taken into account to ensure reliability and accuracy.
Market Comparables
Another alternative method is the use of market comparables. This method relies on the analysis of market-priced transactions that have occurred within a certain period of time. This can include both the sale of closely-held companies and equity investments made in the company. The market comparables derived from the analysis can then be used as a proxy for determining the value of the private company.
Discounted Cash Flow Analysis
The use of discounted cash flow analysis is also another alternative method for determining the value of private companies. This method relies on the use of a discounted cash flow model to determine the present value of the future cash flows of the company. The key components of the model such as the cost of capital and risk-adjusted cash flow projections are adjusted and tailored to the data collected from the private company. The result is then used to determine the value of the private company.
Excel Resources
When carrying out valuations of private companies, some knowledge of the Microsoft Excel spreadsheet platform is essential. Fortunately, Excel has a range of tools, plug-ins and templates to allow users to plan and model their work.
Free Templates
The Microsoft website offers several free Excel templates to assist with private company valuations. These templates contain sheets already populated with formulas and calculations that can help users easily input the relevant data and instantly calculate the value of the company.
Online Tutorials
The Microsoft website also features an ever-growing library of video and written tutorials to guide users in both simple and advanced functions on Excel. The “Valuation Spreadsheet Modeling” page includes several step-by-step lessons on Excel’s more sophisticated capabilities, while the “Microsoft Excel Trainer” page contains exhaustive lessons on the program’s more basic operations.
For those wishing to deepen their understanding of Excel even further, there are several third-party platforms that offer comprehensive video courses. Sites such as Udemy, Coursera and LyndaVideos offer further guidance in Excel and other office applications.
Tips for Advanced Excel Users
For advanced Excel users, the tips and tricks outlined in previous chapters may be of lesser value. Experienced users may require advanced Excel strategies and techniques to accurately value private company investments. To meet the needs of these users, the following tips should be kept in mind when using Excel as part of the valuation process.
Integrate Data Sources
In order to accurately value private company investments, users must consider numerous data points over multiple time periods. This may include financial information, industry trends, macroeconomic indicators, and stock data. To accurately value private company investments Excel users can integrate various data sources into the valuation process.
Using formulas and other features of Excel, a user can quickly integrate data from other sources into a single document, making it easier to analyze and compare the data in a single view. For example, a user can enter financial information from a company’s Annual Report into one Excel worksheet and combine it with industry trends from a different source into a different worksheet.
Use Excel Macros
Another way Excel users can save time when valuing private company investments is to utilize macros. Macros are custom scripts and programed functions that can automate certain processes within Excel. Excel macros can be used to automate data entry, calculations, compiling data sets, and generating charts. As a result, macros can significantly reduce the amount of work required to accurately value private company investments.
By creating a specific macro for each valuation process, users can quickly and accurately value private company investments using Excel. For example, users can create a macro to quickly generate charts from a data set or create a macro to quickly calculate equity value based on a certain set of variables.
Conclusion
Private companies are complex investments that come with a variety of risks and rewards. Whether through a direct purchase or through a fund, investors need to understand the various valuation methods when considering a private company opportunity. With Excel, investors can use various resources, such as templates and formulas, to assist in the decision-making process.
To summarize, private company investments can provide good returns, but investors need to be aware of the different valuations methods available. Common methods include comparable companies, precedent transactions, discounted cash flows and an asset approach. With the help of Excel, investors have the potential to accurately assess potential investments and take necessary steps to protect their investment.
Summary of Private Company Investments
Private companies are unique investments and come with a variety of risks and rewards. When it comes to calculating the intrinsic value of a private company, investors need to understand the various valuation methods. These can include comparable companies, precedent transactions, discounted cash flows and an asset approach.
Recap of the Alternative Valuation Methods
Each of these methods has its own set of benefits and drawbacks, making it important for investors to understand when each one should be applied. Investors should also take into account external factors such as the stability of the market and industry trends when performing an analysis of a private company.
- Comparable Companies: Valuation of a company using an analysis of the market comparables.
- Precedent Transactions: Valuation of a company using a comparison of similar deals.
- Discounted Cash Flows: Valuation of a company using a discounted cash flow analysis.
- Asset Approach: Valuation of a company using an analysis of its assets.
Overview of Excel Resources to Use
Once the appropriate method of valuation is determined, investors can then begin to determine the intrinsic value of the company. Excel can be an advantageous tool for investors to use for this purpose. It offers spreadsheets and templates to help cut down on the number of calculations that need to be made, as well as formulas and other resources for investors to use.
In conclusion, private company investments are complex investments and require accurate valuations before proceeding. Excel can provide investors with the necessary tools to help them make sound investments. Through these resources and a thorough understanding of the different valuation methods, investors will have the potential to make informed decisions when investing in private companies.