Business valuation using correct formulas using dubious data

Every generation needs a revolution - an entrepreneurial revolution

This post was shown a due diligence report but reporting a valuation of only 6 number for a business

coughing out P4 - 5 million a year

Some errors were observed in the work purportedly a certified public accountant.  It was neither a due diligence nor a proper valuation report

1.  In the asset portion, the cash of the business totaling P8 m was totally disregarded?  What?  You are valuing the asset of the business and not considering if the cash will be dissipated or not

2  The consultant arrived at a Weighted Average Cost of Capital which was achieved only on the 5th year  And conveniently used this as WACC (ergo for the discounted cash flow the intrinsic method, a high 55% WAC would result in lower valuation

3.  In the intrinsic portion (NPV) analysis, there was no current year cash flow (and in actuality, the current net  cash flow amounts to P4.5 million

    1  In the projected cash flow for the next five years, 2023 cash flow is only P9,k

    2.  The WAC again of 55% erroneously computed is used as the discount factor.  The high %

         results in a very low valuation

PSE lists WACC at only 6.84 % and the 55% /5 is only 11%

Not every body understands business valuation    At entrepreneurship we teach  this skill

Negotiating/evaluating a school for sale

Every generation needs a revolution - an entrepreneurial revolution

Rizal Philippines
August 26, 2016

I was on a meeting Tuesday afternoon with the representative of a primary and secondary (with Senior High) in a MM city.  In the meeting were:  the President of the Company, a lawyer, a banker, and two representatives of the seller

Some issues:

1. The price is P50 million.  The appraised value of the property is P70 million.  So this is a good asset buy.  However, the school does not make money.

From a net income approach valuation, the price of the school is zero.

The audited financial statement says it makes a revenue of P24 million a year, or P2 million a month (misleading because the tuition payment is quarterly).  The direct cost is P21 million a year, and GA expenses is P4 million.   We learned from additional information given that part of the monthly expenses is interest payments made to dozens of the creditors of the School Director who amassed some P74 million in private debt (as no banks would lend to a school asset - they could not foreclose)  Without the debt service, the school could be profitable earning some P12 million  a year.


2.  Manner of payment: