#+title: Section 9 | Lesson 50 - How to Value Private Companies and Growth Methods #+HTML_HEAD: * Links - [[./../mba-main.org][TOC | Business]] - [[https://www.udemy.com/course/an-entire-mba-in-1-courseaward-winning-business-school-prof/learn/lecture/5805330#overview][S09:L50. How To Value Private Companies the Easy Way & Growth Methods]] - tables: [[file:../_data/market share spreadsheet.numbers][Market Share Spreadsheet.numbers]] * Notes ** Financial Table | Year | 2015 | 2016 | 2017 | 2018 | |-----------------------------------+-----------+------------+-------------+-------------| | Revenue | 2,000,000 | 20,000,000 | 350,000,000 | 661,500,000 | | COGS (Cost of Goods Sold) | 1,800,000 | 16,000,000 | 175,000,000 | 264,600,000 | | Gross Profit | 200,000 | 4,000,000 | 175,000,000 | 396,900,000 | | Gross Margin % | 10% | 20% | 50% | 60% | |-----------------------------------+-----------+------------+-------------+-------------| | *Gross Profit = Revenue - COGS* | | | | | | *GM pct = Gross Profit / Revenue* | | | | | ** Financial Table: Operating Expenses | Category | 2015 | 2016 | 2017 | 2018 | |----------------------------+---------------+----------------+-----------------+-----------------| | Sales & Marketing | ₪500,000.00 | ₪4,000,000.00 | ₪66,500,000.00 | ₪112,455,000.00 | | % of sales | 25% | 20% | 19% | 17% | | % YOY | | | | | |----------------------------+---------------+----------------+-----------------+-----------------| | General & Administrative | ₪500,000.00 | ₪4,000,000.00 | ₪66,500,000.00 | ₪112,455,000.00 | | % of sales | 25% | 20% | 19% | 17% | | % YOY | | | | | |----------------------------+---------------+----------------+-----------------+-----------------| | Research & Development | ₪4,000,000.00 | ₪20,000,000.00 | ₪24,500,000.00 | ₪26,460,000.00 | | % of sales | 200% | 100% | 7% | 4% | | % YOY | | | | | |----------------------------+---------------+----------------+-----------------+-----------------| | *Operating Expenses Total* | ₪5,000,000.00 | ₪28,000,000.00 | ₪157,500,000.00 | ₪251,370,000.00 | *** Operating Expenses these can also be found in every company - Sales & Marketing - General & Administrative - Research & Development *** how to calculate 1. go see similar publicly traded companies and find out what percent of revenue/sales - security and exchange commision requires all publicly traded companies to put this up 2. from the initial point we make assumptions ** Operating Profit (EBIT) - the company is breaking even when Total Operating Expenses equals or exceeds Gross Profit - In the example, this occurs in year 2017 \[ \text{Operating Profit (EBIT)} = \text{Gross Profit} - \text{Operating Expenses Total} \] *** Key Components of EBIT 1. *Revenue*: Total income from sales or services. 2. *COGS (Cost of Goods Sold)*: The direct costs of producing the goods or services sold by the company. 3. *Gross Profit*: Revenue minus COGS. 4. *Operating Expenses*: Costs not directly tied to production, such as: - Sales & Marketing - General & Administrative (G&A) - Research & Development (R&D) *** Why EBIT Is Important 1. *Operational Focus*: EBIT shows how efficiently a company runs its operations without considering external factors like financing (interest) or tax obligations. 2. *Comparison*: Useful for comparing companies in the same industry, as it ignores the effects of different tax rates and financing structures. 3. *Profitability Analysis*: Highlights whether the core business is profitable. ** What is YOY? *** Definition YOY stands for *Year-over-Year*. It is a method of comparing data from one period (usually a year) to the same period in the previous year. YOY is often used in business, finance, and economics to evaluate *growth*, *performance*, or *trends* over time. *** Formula \[ \text{YOY % Change} = \frac{\text{Current Year Value} - \text{Previous Year Value}}{\text{Previous Year Value}} \times 100 \] *** Why YOY Is Important 1. *Growth Analysis*: YOY highlights whether a metric (like revenue, profit, or expenses) is increasing or decreasing compared to the previous year. 2. *Seasonal Neutrality*: YOY comparisons help account for seasonality, as the same time periods are compared. 3. *Trend Insights*: Helps identify long-term trends and patterns by consistently comparing yearly changes. *** Example Calculate YOY for *Revenue*: | Year | Revenue (₪) | YOY % Change | |------|-------------------|-----------------------------------------------| | 2016 | ₪20,000,000.00 | \((20,000,000 - 2,000,000) / 2,000,000 \times 100 = 900\%\) | | 2017 | ₪350,000,000.00 | \((350,000,000 - 20,000,000) / 20,000,000 \times 100 = 1650\%\) | | 2018 | ₪661,500,000.00 | \((661,500,000 - 350,000,000) / 350,000,000 \times 100 = 89\%\) | | 2019 | ₪999,600,000.00 | \((999,600,000 - 661,500,000) / 661,500,000 \times 100 = 51\%\) | | 2020 | ₪1,399,440,000.00 | \((1,399,440,000 - 999,600,000) / 999,600,000 \times 100 = 40\%\) | *** Updated Financial Table | Year | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | |-----------------------------------+------------+-------------+--------------+--------------+--------------+----------------| | Revenue | ₪2,000,000 | ₪20,000,000 | ₪350,000,000 | ₪661,500,000 | ₪999,600,000 | ₪1,399,440,000 | | COGS (Cost of Goods Sold) | ₪1,800,000 | ₪16,000,000 | ₪175,000,000 | ₪264,600,000 | ₪299,880,000 | ₪279,888,000 | | Gross Profit | ₪200,000 | ₪4,000,000 | ₪175,000,000 | ₪396,900,000 | ₪699,720,000 | ₪1,119,552,000 | | Gross Margin % | 10% | 20% | 50% | 60% | 70% | 80% | | YOY | 0 | 900% | 1650% | 89% | 51% | 40% | |-----------------------------------+------------+-------------+--------------+--------------+--------------+----------------| | *Gross Profit = Revenue - COGS* | | | | | | | | *GM pct = Gross Profit / Revenue* | | | | | | | *** Uses of YOY 1. *Revenue Growth*: Are sales increasing year over year? 2. *Expense Management*: Are costs growing faster than revenue? 3. *Profitability Trends*: Is the business becoming more or less profitable over time? 4. *Operational Insights*: Are marketing or R&D expenses increasing efficiently year over year? ** taxes and interest | | 2015 | 2016 | 2017 | |-------------------------------+------------+--------------+---------------| | Revenue | ₪2,000,000 | ₪20,000,000 | ₪350,000,000 | | COGS (Cost of Goods Sold) | ₪1,800,000 | ₪16,000,000 | ₪175,000,000 | | Gross Profit (Revenue - COGS) | ₪200,000 | ₪4,000,000 | ₪175,000,000 | | Total Operating Expenses | ₪5,000,000 | ₪28,000,000 | ₪157,500,000 | | EBIT (Gross Profit - TOE) | -₪4,800,00 | -₪24,000,000 | *₪17,500,000* | | Interest | | | ₪85,000.00 | | Tax | | | ₪4,250,000.00 | | % of EBIT | | | 24.29% | *** % of EBIT formula \[ \text{Tax as \% of EBIT} = \left( \frac{\text{Tax Amount}}{\text{EBIT}} \right) \times 100 \] *** Why No Taxes Before 2017? **** Taxes Are Based on Profit (EBIT) - Corporate taxes are typically calculated as a percentage of **profit** (Earnings Before Interest and Taxes, EBIT). - If the EBIT is **negative** (i.e., the company has an operating loss), there’s no taxable income, and thus no corporate income tax is owed. **** Losses in 2015 and 2016 - EBIT values: - 2015: -₪4,800,000 - 2016: -₪24,000,000 - Since the company had **operating losses** during these years, there was no taxable profit. **** Profit in 2017 - EBIT in 2017: ₪17,500,000. - By 2017, the company had a positive EBIT, meaning taxable profit existed, and taxes were applied from that year onward. *** How Losses Affect Taxes - Loss Carryforward - Many tax systems allow companies to carry forward losses from previous years to offset future taxable income. - Loss carryforwards reduce taxes owed in profitable years. *** No Tax Obligation Without Profit - If a company doesn’t generate profit, it generally doesn’t pay income taxes. - Other taxes (e.g., payroll, VAT, property taxes) may still apply. *** Conclusion - Taxes weren’t calculated before 2017 because the company didn’t have taxable profit. - Once the company turned a profit in 2017, taxes were applied. ** IP Valuation: Growth vs Value - Assume an Initial Public Offering (IPO) in 2020 - Based on the Financial data given, how and what will different types of investors PAY for this company *** Growth Investors - focus on *revenue* as the primary metric - especially for high growth companies - take the revenue in the year of the IP and multiply it by 10, that is what they will pay \[ \text{Growth Investor Valuation} = \text{Revenue for IPO Year} \times 10 \] *** Value Investors - focus on *current profitability* (earnings, ie EBIT) - lower valuations for high growth companies - high growth companies reinvest profits into expansion, research, etc. \[ \text{Value Investor Valuation} = \text{EBIT for IPO Year} \times 10 \]