Mittwoch, 26. September 2012

Valuation of entrepreneurial businesses - A business is more than itself

No two businesses are completely alike. Human resources make the difference. This leads to problems when applying multiple approaches to valuing businesses, whether small or big. Furthermore, for small businesses - "A small business is not a little big business", WELSH and WHITE, 1981 - the capital market is utmost imperfect. For this reason the several variations of the DCF approach are not convincing for the purpose of valuing entrepreneurial businesses. So an alternative approach to valuing entrepreneurial businesses is necessary. Such an alternative is the Functional Valuation theory:
Editorial: Research on entrepreneurial finance - today and tomorrow. Michael OLBRICH, IWP Institut für Wirtschaftsprüfung, Saarland University.
Int. J. Entrepreneurial Venturing, Vol. 4, No. 3, 2012.
The success of a new business mainly depends on two factors: the uniqueness of the business model and the ability of the entrepreneur to properly turn this idea into reality. However, it is also because of these two factors that entrepreneurial initiatives almost always go together with certain challenges. On the one hand, due to the singularity of the business concept, there are no experience values on which one can draw upon when appraising a new venture’s strengths and weaknesses. Moreover, since there is no data history at all, or just a very short one, the forecast of a young company’s turnovers and profits turns out to be an extremely demanding task. On the other hand, it is often the case that although the entrepreneur does have the technical skills to develop the product or service he has in mind, he lacks the required funds (Olbrich, 2002; Hering and Olbrich, 2002), business experience, and/or network to put his ideas into reality. Furthermore, entrepreneurial firms act in the environment of a highly imperfect capital market. This means in particular that debit and credit rates are unequal, the market participants’ ability to raise capital is limited and their tax burdens and information levels differ (Dixon, 1991; Hering, 2000; Brösel and Matschke, 2004) [...]

Valuation plays an important role in venture financing. For instance, when shares are issued to business angels or when an IPO is prepared, the parties involved have to determine the minimum/maximum price they have to demand/are able to pay if they do not want to change their initial wealth position for the worse. However, due to the capital market imperfections as well as the high degree of uncertainty, valuation models have to fulfil multiple requirements [...]
BRÖSEL, MATSCHKE and OLBRICH present an approach to valuation which feature a technique sophisticated enough to fulfil these requirements:
In their article, ‘Valuation of entrepreneurial businesses’, Brösel, Matschke and Olbrich describe the functional theory of company valuation as an alternative approach to valuation. First of all, the authors work out the characteristics of small businesses and show that traditional methods like multiples, DCF, and real option approaches cannot handle the specifics of those valuation objects adequately. With the future earnings method and the state marginal price model, Brösel, Matschke and Olbrich then present two tools to derive the decision value of the entrepreneur. On this occasion, they also consider the problem of uncertainty and come to the conclusion that the way DCF methods process risk is flawed in many respects, while a Monte Carlo simulation leads to better results, in particular because such simulations show the complete range of possible outcomes of the decision value [...]

 truthisithurts by Tauba Auerbach

Valuation of entrepreneurial businesses

Abstract: "A small business is not a little big business" (Welsh and White, 1981) - this also holds true for valuing small businesses. Such companies act in utmost imperfect markets, are generally unique and the forecast of their future profit is rather difficult. These characteristics impede the use of DCF and real option methods, as well as of multiples. Therefore, this paper presents the functional valuation theory as an alternative approach to valuation. Its partial and general models allow a better adaption to the characteristics of entrepreneurial businesses, especially when these models are combined with a Monte Carlo simulation.

Brösel, G., Matschke, M.J. and Olbrich, M. (2012) 'Valuation of entrepreneurial businesses', Int. J. Entrepreneurial Venturing, Vol. 4, No. 3, pp.239-256.

Gerrit Brösel is the Head of the Department of Auditing at the FernUniversität in Hagen. His research focus is on financial reporting, statement analysis, auditing and business valuation.

Manfred J. Matschke holds the Chair of Business Administration and Corporate Finance at the University of Greifswald. His research focus is on business finance and business valuation.

Michael Olbrich is the Chairman of the Institute of Auditing at Saarland University. His research focus is on accounting, auditing and business valuation.

Access to Full Text

Unternehmensbewertung im 21. Jahrhundert


Montag, 17. September 2012

Equity Risk Premium 2012

Aswath Damodaran, Stern School of Business, hat gezeigt, dass die implizite Berechnung der Marktrisikoprämie ein besserer Schätzer ist als andere Methoden. Eine weitere Erkenntnis ist, dass die Marktrisikoprämie sehr reagibel ist und für die Zwecke der Unternehmensbewertung in monatlichen Abständen neu berechnet werden sollte.

Sonntag, 16. September 2012

"Safer Valuation" verhütet "Auftragskunst"

Aswath DAMODARAN spricht gerne von "the Dark Side of Valuation". Er warnt damit vor den Gefahren, die bei der Bewertung ertragsloser junger Unternehmen lauern, wenn man finanzierungstheoretisch basierte Modelle der Unternehmensbewertung anwendet. Eine andere Schattenseite der Unternehmensbewertung betritt, wer sich als Bewerter instrumentalisieren lässt, indem er eine "Auftragskunst" anfertigt, die dem Management des bewerteten Unternehmens lediglich dazu dient, bereits getroffene Entscheidungen zu rechtfertigen. Die oft zitierte Auffassung, wonach die Bewertung von Unternehmen mehr Kunst als Wissenschaft sei, wird gerne falsch interpretiert.

Gerrit BRÖSEL und Mario ZIMMERMANN greifen dieses in der Fachwelt stark vernachlässigte Problemfeld in ihrem Beitrag Projekt "Olympia" - Mappus "Fair play"? (In: DER BETRIEB, Heft 32 vom 10.08.2012, Editorial) auf:

Citius, altius, fortius lautet das olympische Motto - "schneller, höher, stärker"; wobei sich in Deutschland "schneller, höher, weiter" eingebürgert hat. Olympia lautet schließlich der Projektname für den unter Leitung von Ministerpräsident a. D. Stefan Mappus durchgeführten Rückkauf von EnBW-Anteilen durch das Land Baden-Württemberg. Dieser verteidigt sich öffentlich mit Verweis auf das Vorliegen nicht nur einer sog. Fairness Opinion. So wird bei einer Unternehmenstransaktion die Stellungnahme eines sachverständigen und unabhängigen Dritten bzgl. der finanziellen Angemessenheit einer Angebotsleistung bezeichnet. Hierbei drängen sich im bezeichneten Fall einige Fragen auf.

Offenbar geben die Anforderungen der "Deutschen Vereinigung für Finanzanalyse und Asset Management" (DVFA) und damit 

die selbsternannten "Regeln der Kunst" für Investmentbanken in Deutschland

gute Gestaltungsspielräume für derart kunstfertige Bewertungen. Anwender der investitionstheoretisch fundierten Funktionalen Unternehmensbewertung zählen dagegen nicht zu den "Kreativen" der Branche. Anders ausgedrückt: Die von kreativen Bewertungen Betroffenen sind bei der Funktionalen Unternehmensbewertung vor Kunstgriffen sicher:

Eine sachgerechte Angemessenheitsprüfung erfordert die investitionstheoretisch fundierte Ermittlung eines Grenzpreises aus Sicht des Landes Baden-Württemberg unter Berücksichtigung von dessen Zielsystem und Entscheidungsfeld und den sich anschließenden Vergleich dieses Grenzpreises mit dem Angebot (ex ante) bzw. mit dem Preis (ex post). Die DVFA stellt bei der Ermittlung eines Referenzwerts hingegen auf finanzierungstheoretische Bewertungsmethoden (z. B. sog. DCF-Methoden), welche realitätsferne Prämissen unterstellen, auf Vergleichsverfahren, welche weder subjektabhängig noch zweckorientiert sind, sowie auf das aktuelle Kapitalmarktumfeld (z. B. mittels Börsenkursen oder von Analysten veröffentlichten Kurszielen) ab.

Projekt "Olympia"- Mappus "Fair Play"

Prof. Dr. Gerrit Brösel, Inhaber des Lehrstuhls für BWL, insbes. Wirtschaftsprüfung, FernUniversität in Hagen / Dipl.-Kfm. Mario Zimmermann, wissenschaftlicher Mitarbeiter am Fachgebiet für ABWL insbes. Rechnungswesen und Controlling, TU Ilmenau

Unternehmensbewertung im 21. Jahrhundert

Freitag, 14. September 2012

Deal of the day or Death Spiral?

Aswath Damodaran on Groupon Gloom (August 24, 2012):

In keeping with this week's theme of revisiting ghosts of valuations past, I decided to take a look at another fallen angel, Groupon. The stock has collapsed to $4.44 from its post-IPO high of $29 and investors and employees seem to be fleeing from the exits. If you are a contrarian with a strong stomach, it would like the stars are aligned for some bottom fishing but is Groupon a buy, even at this discounted price?

To make this assessment, I decided to take a look at my posts on Groupon from last year:

  1. In my very first post on Groupon in June 2011, I looked at their attempt to move customer acquisition costs from the operating expense to capital expenditures column. While I was sympathetic to the general argument that operating expenses that create benefits over many years (such as R&D, exploration costs and even customer acquisition expenses) should be treated as capital expenditures, I was skeptical in Groupon's case since there was little evidence that Groupon's acquired customers stayed on for long periods and also because Groupon did not follow through fully and treat customers as assets (and amortize or depreciate these assets over time). 
  2. In my second post in October 2011, I looked at Groupon (as well as Google and Green Mountain) with an eye towards potential growth, using four tests: the feasibility of the growth given the overall market served by each company, the capacity to scale up growth (i.e., maintain growth as the companies get bigger), the value created by that growth and the effect of management credibility on how the market perceives that growth.  
  3. In my third post on November 2, 2011, I valued Groupon at the time of the acquisition. Using  "aggressive" assumptions on revenue growth (50% annually for first 5 years, scaling down to mature growth by year 10) and pre-tax operating margin (23%), I estimated a value of $14.62 per share, below the $16-$20 range that investment bankers were touting.
  4. The stock did go public on November 3, 2011, at $20/share, and jumped to $28 by the end of the day. My fourth post on Groupon, on November 4, 2011, looked at the company in the context of a discussion of the value of growth. For growth to add value, I argued that it has to be accompanied by "excess returns", which, in turn, require competitive advantages or barriers to entry. Looking at Groupon's business model, I could not think of any significant barriers to competition that would prevent others from entering the market and eating away at Groupon's margins. Using a simulation, I estimated the following distribution for value/share for Groupon in November 2011 and argued that the stock was more likely to be worth less than $10/share than it was to be be worth $30:

 A year later, it is clear that I under estimated how quickly any competitive advantages that Groupon's first mover status gave them would be eroded. This is clear not only from perusing my email box every morning (and removing the dozen emails from different deal-of-the-day purveyors) but also in Groupon's financial results. As the most recent earnings report makes clear, revenue growth has slowed, profitability has lagged and the stock price collapse is in reaction these changes.

As I revisited my valuation, as with Facebook, I had to caution myself not to overreact, but the news, as I see it, is far more dire for Groupon than it is for Facebook. While Facebook's results were disappointing in terms of converting potential to profits quickly, the potential (from their vast user base and the information they have on these users) still remains. In Groupon's case, where the business model was clearer at the time of the IPO, the business model has collapsed and it is difficult to see what the company can do to set itself apart from the competition and make money at the same time. As a result, the changes I made in my Groupon valuation are more dramatic than the changes I made in my Facebook valuation. My base year numbers reflect their most recent quarterly filing, with trailing 12-month revenues of $1.965 billion and operating income of $71 million. My forecasted revenue growth rate is 25% (leading to revenues in 2022 of $10.3 billion, as contrasted with my earlier forecast of $25.4 billion), my target margin is 12% (down from my year-ago estimate of 23%) and my sales/capital ratio is now down to 1.25 (from a year-ago estimate of 2.00). The end result is a value per share of $4.07, which makes the stock, at best, a fairly priced stock. In fact, if you bring in the likelihood that the firm may not make it through its growth pains in the spreadsheet, the value per share drops even further. As with the Facebook valuation, you can download my spreadsheet and put your own estimates in... I have a shared Google spreadsheet for those of you who want to share your numbers...

 There are two broader point that are worth making here.

  1. A dramatic stock price drop is not always a buying opportunity: Most young growth stocks are subject to gyrations and it is not uncommon to see growth stocks plummet, when they don't meet the lofty expectations that investors have for them, and we have seen this happen to both Facebook and Groupon. In some cases, investors over react and push the price down far more than they should and that is the basis for my pitch I made for friending Facebook in my last post. In some cases, though, the stock price collapse is well-deserved and that is my rationale for avoiding Groupon. 
  2. Intrinsic valuations can (and should) change over time: There is deeply held belief, at least in some quarters, that intrinsic valuations are stable and don't change over time. While that may be true in many companies and most time periods, there are three exceptions. The first is a dramatic change in the macro environment. My intrinsic valuations for almost all companies changed between August 2008 and October 2008, as the market price of risk (in the form of equity risk premiums and default spreads) increased dramatically in the aftermath of the banking crisis. The second is when accounting fraud is uncovered and key numbers have to be restated. The third is with young growth companies where the premise on which the value of growth is based - that it is scalable, defensible and valuable - is called into question. It is the third exception that applies to Groupon and I feel comfortable lowering the value per share from $14.82 a year ago to $4.07 today.