Page 53 - FINAL CFA II SLIDES JUNE 2019 DAY 8

LOS 33.i: Calculate the value of a private company
based on market approach methods and describe READING 33: PRIVATE COMPANYVALUATION
advantages and disadvantages of each method – 3
types! MODULE 33.3: MARKET-BASED VALUATION

Guideline Transactions Method (GTM)
Prior acquisition values for entire (public and private) companies that already reflect any control premiums are used, so no
additional adjustment for a controlling interest is necessary.

When using multiples from historical transactions, several issues should be considered.

Transaction type: Once again: strategic versus non strategic?
Contingent consideration (CC): That part of the acquisition price that is contingent on the achievement of specific company
performance targets, such as receiving FDA approval for a drug. As CC increases the risk to the seller, transactions with CC
should be scrutinized before they are compared to transactions without such contingencies.
Type of consideration: Share versus cash? Comparing transactions of different consideration type may not be relevant.
Availability of data: The historical data for comparables that are relevant and accurate may be limited.
Date of data: If the sales of the comparable companies were very long ago, the prices and estimated premiums may not be
relevant to the extent that macroeconomic and industry conditions have changed.

EXAMPLE: Natalie Hoskins is valuing a private firm, Lafayette Furniture, for acquisition using the Guideline Transactions Method
and MVIC to EBITDA multiples. Hoskins deflates the average public company multiple by 30% to account for the higher risk of
Lafayette. Other data are as follows:

The adjustment to the MVIC/EBITDA multiple for the higher risk of
Lafayette Furniture is: 7.2 × (1 − 0.30) = 5.0

The adjusted multiple is applied against the normalized EBITDA:
5.0 × $18,200,000 = $91,000,000

Subtracting out the debt results in the equity value:
Calculate the equity value of Lafayette Furniture using $91,000,000 − $1,400,000 = $89,600,000
the Guideline Transactions Method.