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Value Indicators for Intangible Oriented Companies
Thinking about how your company will be valued by those with big bucks? If you have a public company that is heavy in intangible assets, this 6 paper is a must read! Many factors contribute to the overall value of a small growth company. This analytical overview identifies some of the key issues to understand if and when seeking a valuation of a small company for the purposes of steering the operational ship and making strategy decisions. INDICATORS OF VALUE FOR INTANGIBLE ORIENTED COMPANIES Leveraging proprietary data on 100 publicly traded technology companies from an index for an industry and a study which also considers about 50 private market technology based companies that are for sale each year, allows one to develop a sense of what a company might be worth in the eyes of the institutional market. Every company has unique characteristics that have to be taken into account, e.g. market share, industry dynamics, management, etc. This analysis considers those in addition to the 3 key top level quantitative variables that have been found to be the most reliable predictors of the value of a technology or intangible asset based companies: Revenues, Normalized TTM EBITDA (Trailing Twelve Month Earnings before Interest, Taxes, Depreciation and Amortization), and the historical (12 month) Growth in Revenues. Since many OTCBB companies operate rather like a developmental stage company in terms of the operational undertaking, these metrics can be modified to be forward looking rather than historical. Examining a number of other variables (such items as pro forma mid term earnings growth, book value, etc.) using regression analysis, typically produces very little incremental information thus add little value to the process if included. This methodology does not wildly contradict the accepted wisdom from academia. Not wanting to rely solely on the unassailability of statistics, an explanation of the trio of "value predictors" follows: Revenues: Tend to give a sense of the cash flow a business can produce (despite the fact that it may have a miserable track record of doing so) in the right hands. Consequently, revenue multiples tend to be useful for businesses that are normal in terms of performance as opposed to “shooting stars”; Normalized TTM EBITDA: This is the sort of proxy for cash flow that the academics favor. The "A" is important, since technology and other intangible asset based companies tend to take big write-downs when they acquire other companies, which would otherwise depress EBIT. Depreciation or Amortization numbers and historical financials were not significant part of our process because at this stage of their development D&A is nominal if any therefore EBIT is an acceptable proxy for EBITDA. Growth in Revenues:While growth is a standard feature of models, most people find it odd that the short-term growth in revenues (i.e. the last 12 months) is more important than longer term growth, or earnings growth. The short-term focus is probably not that hard to justify given the recent fickleness of the stock market. The focus on revenues rather than earnings is a little tougher: The explanation is that recurring revenues and the attractive earnings associated with them tend to follow quickly in the footsteps of the lower contribution license and services sales; hence growth in revenues begets growth in earnings / cash flow, which soon gets translated into value. How this applies to a company. If a company were growing revenues at a rate in excess of 100% per annum and making substantial profits, on revenues in excess of $50MM, then the company is clearly worth better than 20 times revenues. One would most certainly recommend an initial round of VC perhaps but more likely immediately in a traditionally underwritten IPO. [continued...] Want to know more? Download the White Paper "Value Indicators for Intangible Oriented Companies" for just $49.95. People who ordered this paper also ordered: |
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