The ACG Cup

Competition Workshop

Kenneth E. Jones
Boathouse Capital
January 28, 2009
I. Presentation Skills and Organization
II. Valuation of Private Companies
III. Private Company Financial Metrics
IV. How to Avoid Mistakes
What We Are Going to Cover
I. Presentation Skills and
Organization
Some tips on how to deliver the best case:
Everyone should have a speaking part; not just pushing a
button
State your assumptions and elaborate on the premise
Use all relevant valuation methods
Provide a pitch book quality presentation
Use PowerPoint and Excel to create charts and graphs
Understandable and Pithy re-write and edit it down to the
essence; use oral skills to add color or explanations
Organization of Presentation
Be concise and use an orderly format
Index, Executive Summary, Presentation, Conclusion,
Appendices
Presentation Skills and Organization
The best case covers all the fundamentals and is professionally
delivered both verbally and visually
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II. Valuation of Private
Companies
There are four most commonly used valuation methods
1. Comparable transactions
2. Comparable public companies
3. Discounted cash flow
4. LBO Valuation

Valuation of Private Companies
Valuation Methodologies
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Theory: Companies bought and sold in similar industries can be used
to value a private company. Use multiples of sales, EBITDA and EBIT.

M&A multiples can be applied directly to private company
earnings and sales without adjusting for a control premium
Private sales are difficult to get good information
Adjustments to EBITDA may not be factored into the multiple
Many times, you cant assemble enough transactions to be
meaningful
Only use transactions that have occurred in the last 24 months

Valuation of Private Companies
Valuation Methods Comparable Transactions
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Theory: Public companies are valued every second of every day by
millions of investors. Every piece of public information is reflected in the
stock and bond price.

Provides a quick means to value a company by referring to other
publicly-traded companies with similar operating and financial
statistics
Calculate valuation multiples, which can be applied to private
company earnings
Control premiums stock prices are for minority positions. Must
increase the value for control whats control worth?
Finding the right companies is difficult case studies typically
give you the comparables

Valuation of Private Companies
Valuation Methods Comparable Public Companies
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Theory: DCF is a method of valuing a company utilizing the projected
unlevered cash flows discounted back to a present value using a discount
rate computed using the Weighted Average Cost of Capital (WACC).

DCFs typically derive the highest values
The most assumption-laden method, many based on the future
Need a realistic 5-year projected income statement and balance
sheet (Capex and working capital)
Sales growth rate, margins and discount rates are key to value
Graded on getting the method generally right, not necessarily the
right answer

Valuation of Private Companies
Valuation Methods Discounted Cash Flow (DCF)
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Theory: By leveraging equity with debt and deriving an acceptable return
on the equity, you can value the company based on market rates of return
for debt and equity.

Entails running a model using company projections and a market-
based capital structure
Must be knowledgeable about and apply market levels of debt and
equity to the now leveraged company usually contained in the
case study
Growth of private equity markets has made this method a necessary
one
In the case of a strategic acquirer, a LBO value ignores synergies
Value obtained is sensitive to projections and aggressiveness of
operating assumptions

Valuation of Private Companies
Valuation Methods LBO Analysis
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III. Private Company
Financial Metrics
Private Company Financial Metrics
EBITDA Earnings before interest, taxes, depreciation and
amortization. Measure of cash produced by the companys
operations.
EBITDA less CAPEX Reducing EBITDA by the amount of capital
expenditures derives a better measure of cash flow to service debt
and taxes
Debt to EBITDA Ratio of interest bearing debt to companys LTM
(last twelve months) EBITDA. This is the ratio that leveraged
lenders use to determine the maximum level of debt a company can
handle. With companies with less than $10mm of EBITDA, 2x 3x
is typical; over $10mm, 4x 5x.

Definitions
7
Private Company Financial Metrics
Senior debt First lien bank debt refer to case study for pricing
Subordinated or Mezzanine debt Term debt that is second in priority to
senior debt; typically provided by funds and private finance companies.
Equity Value Market Capitalization for public companies (# of shares
times the share price). For a private company equal to Enterprise Value
minus debt plus cash (net debt).
Enterprise Value Equal to interest bearing debt and equity value
minus cash on the balance sheet (net debt). This is the value of a
company. Also calculated by multiplying LTM EBITDA by a market
multiple.


Definitions (cont.)
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Private Company Financial Metrics
Example of an enterprise and equity value calculation:
Assumptions ($000's)
12/31/08 LTM EBITDA 24,000 $
Amount of debt at 12/31/08 110,000 $
Cash at 12/31/08 5,500 $
Market Multiple 8.0
Calculation ($000's)
12/31/08 LTM EBITDA 24,000 $
Market Multiple 8.0
Enterprise Value 192,000 $
Minus Debt at 12/31/08 (110,000) $
Plus Cash at 12/31/08 5,500 $
Equity Value 87,500 $
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IV. How To Avoid Mistakes
1) Use all appropriate valuation methods the case will give you
enough information to do those that are possible

2) Remember your audience and who hired you the Board of
Directors whose foremost fiduciary responsibility are to the owners
of the business.

3) DO NOT get bogged down in the details. Board members will ask a
detailed question if they believe you glossed over something
important. Put detail in appendix.

4) The cases typically give you more information than you need. You
do not need to use everything that is in the case.

5) Make sure you answer the questions the Board is asking.



How To Avoid Mistakes
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6) Focus on Enterprise Value many contestants only focus on Equity
Value and forget about the Debt.

7) Have a handout that is identical to your presentation to the board on
the screen.

8) Unless necessary, dont regurgitate the financial statements in your
presentation.

9) LTM earnings is the only relevant number to use for valuation
purposes.

10) Make sure the presentation doesnt switch between landscape and
portrait.




How To Avoid Mistakes
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ACG Philadelphia Cup 2009
GOOD LUCK!!!