February 20, 2025 • 29 mins
This episode of The Private Equity Experience dives deep into the crucial and often dramatic world of business valuation in private equity deals. Hosts Emily Sander, Rory Liebhart, and Ed Barton explore the complexities, emotions, and strategic considerations determining a company's worth during the "buy phase." They discuss key valuation methodologies (revenue multiples and EBITDA multiples), the importance of revenue recognition, and how "corporate hygiene" (organized and accurate financial records) directly impacts perceived risk and, ultimately, the final valuation. The hosts emphasize that getting the valuation right is paramount, as it sets the tone for the entire private equity hold period and impacts the relationship between the seller and the PE firm. They use the analogy of selling a house to show how expectations and values can differ. The episode explains the importance of understanding your audience in pitches.
Timestamps:
00:00 Introduction: The High-Stakes Deal
00:16 Structuring the Deal: Key Considerations
00:41 Valuation Methodologies and Emotional Factors
02:33 Real Estate Analogy: Setting Expectations
03:34 Investment Bankers: Bridging Perception and Reality
04:50 Revenue Recognition: A Critical Component
07:27 EBITDA Explained: Understanding the Basics
08:34 Adjusted EBITDA: The Art of Creativity
14:43 Choosing the Right Investment Banker
21:45 Corporate Hygiene: Preparing for Valuation
26:27 The Importance of Accurate Valuation
28:43 Conclusion: Setting the Table Right
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Emily (00:34):
Imagine this.
You have built a company fromscratch, and you have put your
blood, blood, sweat and tearsinto this thing, and you have a
potential buyer at the table,but the stakes are super high,
and this could be a lifechanging event.
How do you structure this deal?
What types of things do you needto consider, such as valuation,
methodologies, post transitionpieces, all of that good stuff?
(00:57):
So we're going to dive into thisin this episode, and We have
some stories.
Some of them are good.
of them are different.
But, uh, we've, we've seen thisfrom, from multiple
perspectives.
Ed (01:13):
And I think even more than the art and science, there's a
lot of emotion that people claimas art and science in the, in
the, in the, both the diligenceand the valuation phase of the,
of the business.
Emily (01:27):
Well, I think if people go in and like, are trying to do
like fine tune brush strokeswith like paint within the
lines, they end up doing likeabstract art where they just
spew the.
Paint can across the canvas andbecause they get into it, it's
like their baby and they get sotied up
Ed (01:42):
Well, and it depends.
I mean, I think Rory and Iprobably could use it, you know,
kind of stretching that analogy.
There's been some that have beenlike crayons.
I mean, it's, it's not evenpaint.
It's not brushstrokes.
It's, it's fricking crayons.
And I've, I've, Interestingly,those are largely the ones where
I've been called in to turn themaround because I look at the
valuation.
(02:03):
How did you get there?
And you know the the PE guystend to get and they've been all
guys by the way.
I have yet to find a Roy and Ihave worked with a couple women
in PE and they they've tended tobe less Um, a motive on their,
on their approach to things andthey, and probably more
(02:24):
effective candidly.
Um, but the, all, all the guyshave been like, Oh no, there's
this great opportunity.
And it's, and a lot of it's piein the sky, you know, total
addressable market, Tam, you'llhear that.
Uh, yeah, it's spreadsheet stuffand the reality just doesn't
match.
And I'm like, how did you get tolike 32 X EBITDA for this
business?
Emily (02:44):
a private equity deal, like a deal is like where
spreadsheets meet like a soapopera TV reality show drama.
Ed (02:52):
This is honest to God truth.
that's a, that's the best wayI've ever heard it described.
Yep.
so founders will ask you like,so what's my company worth?
They have a number in their mindalready.
It's like, it's like somebodygoing to the real estate agent.
We use this analogy in the bookand I use it a lot because each
one of these businesses isunique, just like a piece of
real estate.
When you go to sell your house,You, you've done the comps,
(03:15):
you've looked on Zillow, you'relike, I know that this house is
worth, is worth 800, 000.
And then you go to the realestate agent, they're going to
give you a range, and if thatrange doesn't meet your
expectation, you're likely tofind a real estate agent where
that range does meet yourexpectation.
And that, and part of this roleis the investment bankers are
supposed to help you withvaluation value, setting the
(03:39):
expectation as part of theirjob, but they don't get to do
that part unless they get theengagement.
And so there's, there issometimes the You know, when
they're talking to you about theengagement, they'll go, well,
just like a real estate agent.
Well, well, I think this is aunique, unique business and it's
worth block.
And then they get in there andthey go through that.
And we've talked about this afew times that preliminary
diligence and are helping youset up the data room and they're
(04:00):
looking at all this stuff.
They go, well, you know, we, wewere identifying some issues and
they may reset you.
Um, but the investment banker'sjob is to bridge the.
The perception and the realitypart of it, I guess, investment
bankers have a tough job.
Um, but one of their jobs is tobridge the perception of reality
to expectation on valuation andhelp get that deal across the
(04:25):
finish line by getting the priceup on the buy side and getting
the price down and expectationeffectively set on the sell
side.
the other part is, what's thequality of that revenue.
And one of the key components isthe ability to, um, not only
(04:47):
predict, predict that revenue,but also recognize that revenue
properly.
And a lot of the businesses thatwe've been associated with.
Um, you know, and I'm, and I'mthinking all, I'm thinking like
in Rory's case, the, thebusinesses that were, um,
specialty finance related.
So like the B lines of theworld, um, and the, the business
(05:08):
that we worked in together atthe fusion zone, we all had
issues around revenuerecognition.
So you had deferred revenueissues.
You had, you know, when was therevenue recognized, how much,
how much in each period.
And so those become.
Um, areas where duringdiligence, if your, if your
business is generally valued ona multiple of earning or a
(05:29):
multiple of revenue, thoserevenue recognition policies are
going to come under intensescrutiny, um, cause it's really
driving the business valuationand you're going to want to have
some of those elements dealtwith, with your accounting team
before you you know, before,before you go to market so that
a lot of those issues end upresolved.
Emily (05:51):
Yeah.
So let me, okay.
So we've talked about a lothere.
So there's revenue, so there'srevenue and EBITDA, there's the
two big valuation methodologiesjust like to keep it simple,
like big buckets within revenue,which seems relatively
straightforward, which is like,take your revenue amount and
say, okay, what are people inyour industry?
(06:12):
In a similar category projectingor, or doing, um, and there's
lots of nuance in there.
So recurring revenue, I rememberwhen we worked together at a
company we worked at G2, I wasin charge of the client
management team and you bothtold me, Emily, have your team
(06:34):
members people.
Extended or renewed on these onthese certain types of
contracts, which were likelegitimate contract.
They were just for a longerterm, but we would kind of give
in certain places because wewanted the longer term
contracts.
And now and you were explainingit to me.
But now I know, you know,having.
Had my career now.
I understand like, Oh yes,because we wanted to be able to
(06:56):
say predictably we have thisamount of revenue under contract
when we were going out fordeals.
And so that there was, that wasjust for my department, my
client management department.
There were other things we weredoing across the company with
sales and operations andeverything like that, but that's
an example of the nuance.
And the other thing youmentioned, Ed, which I think
(07:16):
just giving these examples isgood.
So people can hear about thedifferent kinds of things we're
talking about is let's just saythat we are both aware of an
occurrence where revenue was.
Was counted in two places,meaning there were a couple of
different areas of the businessand subsidiaries and different
entities within an umbrellabusiness.
(07:39):
And revenue from a product linewas counted in two places.
And that was, that was, uh,somehow missed and later found
out, and that was a problem.
So revenue recognition and howyou calculate things and
structure things, um, isabsolutely under.
Scrutiny in that first revenuecategory.
And then for the second bucket,which is EBITDA, let me just
(08:02):
break this down to make surethat I get it.
And our listeners get it.
Um, earnings before interest taxtaxes, depreciation,
amortization, which is basicallylike a fancy way of just
removing all of those big, likelong term things like, uh, Make
like debt like loans and longterm amortization for like
(08:25):
equipment for like 20 year longtype things where you're taking
a little bit, uh, year over yearfor 20 years.
If you have like, I don't know,a tractor or something or
certain computer equipment hashas these calculations you do.
So you're removing all of thosetypes of things and talking
about cash flow and operatingcash flow.
And then you're doing thesimilar process, right?
So you're saying, okay, forcompanies in my industry,
(08:49):
similar, similar to, um, thetype of company we are, here's
the type of deals that they'redoing.
And here's the type of EBITDAprojections.
they're making.
Is that, is that what we've saidhere in our examples?
Ed (09:04):
Yeah, that's, that's, that's basically correct.
Your, your EBITDA is oneelement, but you normally have
what, and you kind of alluded toit, adjusted EBITDA.
So you've got EBITDA, which isEarnings Before Interest, Taxes,
Depreciation, Amortization.
Those are straightforward addbacks.
And then people like to
Emily (09:24):
is where you can get creative.
Creative.
You can get artistic.
Ed (09:27):
Yes, that's, that's, that's could be Pablo Picasso right
there.
Emily (09:31):
You can be Picasso.
You can finger paint.
You can do interpretive dance,
Ed (09:37):
Jackson Pollock is probably closer to what I've seen in most
of the, most of what I've workedwith.
But yeah, it's, and theintention.
I mean, again, this is a, it's,it's not a secret, but the
intention is most everybodygoes, you get these one time
things.
So you want to take all the onetime good things and say that
they're going to keep happening.
You want to take all the onetime bad things, or even some of
the things that happen once in awhile, and say that they're one
(09:59):
time, and you put those intoyour adjustments column.
So you adjust your revenue up,you adjust your, your, um,
expenses down, and theneverybody will look at that.
And most of the time, discountthe one times.
The, the sellers, the, the, thefounders will tend to pound on
the table and go, you know, thisis absolutely one time and it's
(10:23):
never going to happen again.
And, you know, it was a tax, itwas a tax event or whatever.
But that, that's where a lot ofcreativity comes in on adjusted
EBITDA.
Emily (10:32):
but here's like an interesting part.
So all of these are relative topeers in your Industry.
Ed (10:41):
Mm hmm.
Emily (10:42):
And so I think a lot of people get confused on like the
absolute value, like the number,which I mean, like, I'm trying
to think of an example, likemaybe when you're looking at
like stocks or ETFs or somethingwhere like there's certain
ratios that you look at on thetechnical side, we're like,
okay, that's the number, but itmeans nothing unless you have it
in context
Ed (11:02):
Right.
Emily (11:03):
its category.
So like relative to what, so Ithink it's important to.
Consider that like that's alwaysgoing to be involved or included
at some level in the valuationprocess.
Ed (11:13):
Yeah.
And, and the other, the otherpiece to keep in mind is
valuation headline number is notnecessarily real valuation.
So a lot of times you'll get,and I, I know we talked about
this in the book.
I think we've talked about thison these, on these pods too,
where you're like, well, youknow, they might say they're
offering you a hundred million.
And, you know, when you'regetting your indication of
(11:34):
interest in to gate folks to thenext round or even choose your
final diligence partner to kindof go through process with.
When you look at the actual dealstructure, it might be 75
million or 65 million in cashand then an earn out and then a,
you know, a bunch of contingentpayments or contingent, um, a
(11:55):
basket for, um, liabilities.
And so the entire deal structureneeds to really be analyzed to
figure out what the trueeconomics are.
Because you could say, well, I'mgoing to give you, you know, 10x
EBITDA, which is, you know, Sotwo turns or two more times,
eight, eight X versus 10 X wouldbe two turns, two turns more
(12:16):
than any of the other, any othercomponents.
But then you end up with, youknow, some onerous deal terms in
there that make it almost applesto apples.
It's just, you know, when youstart setting them apples to
apples and showing your cashflows and your present values
and all those things, it's, andthat again, is something that
both the internal team, so theCEO, CFO, As well as outside
(12:40):
counsel, outside advisors andinvestment bankers need to kind
of show apples to apples on theterm sheets or force everybody
into a equivalent term sheet inorder to be able to evaluate.
Emily (12:53):
and so if you're, if we're talking to like a founder,
like my general approach is getevaluation you think is accurate
and fair.
And then also there's like thepersonal piece, which is like,
what does this deal need to looklike for you personally?
And if you've got those two bigrocks, then you're probably
going in the right direction.
(13:13):
Would you add?
Ed (13:15):
yeah.
And again, we've mentioned thisnumerous times, know what you
want when you go into thetransaction, why are you going
in?
And if it's like, no, I'm tryingto get some money off the table,
try to diversify my holdings,but I still want to work for
another seven years.
And I've, you know, reallylooking forward to the bite of
the apple, et cetera.
Optimizing your purchase pricemay not be.
May not be the right answer.
(13:35):
Maybe, hey, can I, can I workwith these folks for the long
haul because that's my goal tobuild value in this business
and, you know, get enough offthe table to make it, make it
worthwhile.
You go with the, I'm getting thehighest headline price, or I'm
trying to optimize my incometoday.
You may end up, if you can'twork with those folks, it's not
going to work.
(13:55):
You're going to end up out.
This is not as if they've gotcontrol.
You're not you're not gonna behappy and you're gonna be
wishing that you had Taken thelesser deal with the folks that
you you jive with Mm hmm
Emily (14:13):
myself and I'm just going to exit this and that's my plan.
So if that's your plan, thenit's like, okay.
And we've, I, you know, we'verun into founders who like say
they care about their teams anddo that whole talk track.
And in reality, they're out forthemselves.
And so, know, that, thatscenario does exist where it's
like literally how big can Imake my personal number?
(14:33):
I don't really care whatleadership is in place
afterward.
Um, I'm going to get mine.
And so like you have all thesedifferent equations or
different, uh, of intendedoutcomes that you're looking
for.
So know that, and we have talkedabout that in the past.
How do you know if you'regetting an accurate and fair
valuation?
If you're like, this is my firstrodeo, like I have an investment
(14:54):
banker, I think this seemsright, like gut check wise, but
I'm kind of basing this on, youknow, not a lot of foundation
here.
What's the best way for someone
Ed (15:04):
You need to have done your homework going into it And once
you've, looked at what the compsare and you've talked to
multiple investment bankers andgotten them to give you feedback
as to what your company's worth.
And again, the other thing thatwe've said over and over again
is that choosing your set ofadvisors, your investment
bankers, your accountants, yourattorneys, that's not, it should
(15:27):
not be a one and done process.
That should be a little bit of alittle bit of a beauty contest,
some interviews, ask those kindsof questions, get some, you'll
get some consensus around whatthe valuation is.
And if you're off thatvaluation, you should understand
why.
high or low, um, going into thattransaction.
And so that's your, the best wayto know it's a good deal or a
(15:47):
fair deal on a valuation side isto have really set those
expectations or have gotten, youknow, a set of expectations from
various sources and then be ableto triangulate that against the
term sheets you're trying toevaluate.
Um,
Emily (16:04):
or three investment banks, or would you suggest an
investment bank and otherentities that would provide
evaluation?
Ed (16:11):
so when you're going through choosing who your investment
banker is going to be, that'sone of the questions you should
be asking is, what do you thinkthe company is worth?
How would you go about coming upwith a valuation?
What are the key drivers tovaluation?
And are there anything, or isthere anything we should be
doing now, between now and whenwe go to market, or between now
and when you buy?
(16:32):
when you, uh, when we get intonegotiations that would help us
improve our valuation or improvethe perception of the business
to potential buyers.
That's so you'll choose oneinvestment banker.
Once you've chosen an investmentbanker, you're basically mated
for the purpose of that, um, forthe purpose of that transaction.
(16:52):
So you're not.
I mean, you can go out and getand pay for, and you're going to
pay for, um, additionalvaluation, uh, information if
you want to have a businessvaluation expert or somebody
like that come in and validateyour offer, um, and that's an
option, especially if you feellike it's, if you just aren't
feeling right, there are folkswho specialize in business
valuation, um, CPAs and othersthat Um, a lot of times for
(17:16):
estates or, or tax issues sothat that way with, with audits,
um, to set values.
Um, so that's something you cando to, to check it, but in, in
general, you should have a goodidea and do that prior to going
to market.
Emily (17:31):
So, so do your research is a, is a huge one.
And then in the investment bankvetting process, you ask them
these types of questions abouttheir approach to valuation and
kind of what they see.
And then you choose aninvestment bank.
Now, just to be clear, are we,are you saying spend the money?
(17:52):
With two or three to get like anactual
Ed (17:54):
No.
So, so yeah, you just ask him.
It's kind of like choosing areal estate agent.
So they're, they're normally aninvestment banker.
They may have some retainers.
So some portion that's, youknow, pay to play.
Um, but most of them, they maketheir money on a percentage of
the sale price and the higherthe sale price and more they
make just like a real estateagent does.
(18:17):
So during that interviewingprocess, they're going to want
to.
Get that business, and that'sthe time to ask a bunch of those
questions.
Emily (18:25):
How would, so as part of that vetting process, do they
give you like a rough estimateof like how they would value the
company?
So you have like three numbersto compare.
Ed (18:35):
And you should be asking that question, and asking what
the drivers are, and asking howthey came to that
Emily (18:40):
So they might not be able to like the deep, deep, deep
dive until they get in, buteveryone in that phase of things
should be able to give you aestimate.
If you're like, okay, likewhatever, uh, three or like four
out of five.
Are in this general range andthis one's kind of known for
being aggressive or whatever acreative Um, that might be one
thing if you're like whole likei'm getting like five different
(19:01):
answers here or you know Bestout of three type of thing.
That's a
Ed (19:05):
I don't have an IB pitch book here, I don't think, and
even if I did, I probablyshouldn't share it, but I, a lot
of times when I've had an IB'spitch, they actually will give
like a sheet of here's Like thelast, in the last 24 months,
here's all the companies thatare close to comp that have
transacted.
Here's the seller, here's thebuyer, here's the valuation,
(19:27):
here's the almost like you wouldget, again, in real estate,
here's all your comps, and thisis how we're coming up with how,
how we would, we think yourcompany's going to be valued.
So they'll have done, they,there's companies like PitchBook
that track all these, uh,transactions, and then the
investment bankers, PE guys, allthe, all these folks that, Rely
(19:48):
on this information, pull thatinformation out, and it's
available for your use.
And if you get three investmentbankers, I'll put, I'll put, you
know, a buck on the fact that80% or 90% of the deals that
they show you on the comps aregoing to be laid out that way.
And they're gonna be the samedeals with the same calculations
(20:08):
and same multiples revenue,EBITDA multiples.
Emily (20:11):
so it seems like you know this If we zoom out, this
overall trend of having publicinformation on things like
Zillow and Kelly Blue Book andPitchBook, you can do a lot of
this research yourself now,which is great.
Still need kind of a specialistonce you get into fine tuning
and get serious about things,but there, there is that
(20:32):
information out there thatpeople should be looking at.
Ed (20:35):
Yeah, and, and the other, the other part, um, is there
the, the underlying componentsof like how fast are you growing
and, and, or how fast were theygrowing and what are the other,
you know, kind of subjective oreven mathematical and growth in
the case of growth, discountrate, interest rate at the time
of which those transacted areall going to be.
(20:56):
Inputs into how they are valued.
So don't take any of that asgospel.
It's broad range But it shouldgive you an idea and you should
be able to triangulate a bunchof those things into a yeah My
company should be worthsomewhere in here And if you're
going through the process andyou start falling outside of
those ranges upper or lower Youshould be asking yourself Why
don't just get excited becauseyou're falling out you're
(21:17):
falling into the upper side ofthe range Understand why you're
falling into the upper side ofthe range Cause it may be an
expectation that's that you'resetting or that especially if
you intend to remain that you'resetting that you're not going to
be able to hit if you'reshowing, you know, quick growth
that, you know, is going toplateau you.
That might be a good reason tosell the business.
It might not be a good reason tostay in the business.
If you know that you're going tohit a plateau and you know,
(21:39):
folks are buying on a, no,that's going to continue to
infinity type of type of thesis.
Emily (21:45):
Okay.
So we've covered a lot of groundhere.
We've talked about, um, revenuevaluation methods, EBITDA
valuation methods, know your whyand know what you personally
want to get out of this.
We've talked about investmentbanks and getting a couple
different perspectives there.
Um, is there any other?
And you've talked about themarket conditions.
We're like, hey, interest ratesand things like that.
(22:07):
Are there any other majorconsiderations where it's like,
okay, if someone's about to gointo this part of the process
for real, make sure they've gottheir ducks in the row over
here.
Ed (22:17):
Yeah, I'll, I'll touch on it.
And Rory has used the.
term corporate hygiene, which Ithink is a little skeevy.
Um, but
Emily (22:26):
It means take a shower in
Ed (22:28):
yeah, but the, the reality of it is a cleaner, your books
and records are the betterpresented.
Your models are the betterorganized your, your, um, The
more your team has rehearsed themeeting so that they riff off
each other well, that all goesinto valuation.
(22:50):
Those are all the subjectivepieces.
And yeah, I teach finance, um,at local universities.
So I, I, you know, a lot of itis math and Rory talked about
the math, but the key on, oneven on the math for the math
nerds, the, the, you've got arisk free rate and a risk
premium.
Yeah.
And so you, the sum of those twois what you discount your
(23:12):
expected future cash flows at.
And you know, Rory kind of hiton that with the EBITDA piece.
That risk premium comes down ifthere's a perception that this
is a less risky trade becauseall this stuff seems really
wired tight.
And so I'm, there's lessunknowns and less unknown,
unknowns, known unknowns andunknown unknowns.
(23:35):
It's my friend Don Rumsel wouldsay.
And so when your discount ratecomes down, your valuation goes
up.
And so as a result, going intothis, Make sure you've got your
books, records, virtual dataroom, pitch, all that stuff down
cold and it looks right and it,and it is right so that you
don't raise risk flags, whichwill then drive the risk premium
(23:57):
up and then drive your valuationdown.
Yeah.
Hmm.
Emily (24:08):
For people to come look at it.
Cause if you just have an emptyroom, it's like, okay, like the
math works out that it, uh, butthis is just like a bare, empty,
gross room.
Whereas if you're like, Oh, likethe sofa could go here and
here's the fireplace and here'show you could make it look, uh,
interior, uh, decorations.
And it was funny.
I had a.
a coaching client who was afounder, original founder and
(24:29):
CEO of a successful businessgoing out for their next round
of funding.
And he was like a nerd throughand through, just like a
technical nerd who could code,who was a genius.
Um, and yes, he was from India.
So he just like hit all thestereotypes and everything.
And he, um, was having trouble.
(24:51):
Giving his pitches to investorsbecause he was just such a
technical nerd.
And so, uh, we worked on acouple of different things, but
one, one is like speaking at alevel that your audience is
going to understand.
So having that like polish, butalso understanding where your
audience is coming from and thatfine balance between delivering
information that is relevant andhelpful to them.
(25:13):
That's at their level withoutbeing condescending.
So kind of threading thatneedle.
But he was such a nerd that youcouldn't get over the fact that
he like, Oh my gosh, like thisis not what we call a people
person.
He just would nerd out onthings.
So we made a joke.
So I said, okay, open it likethis.
Like open it like, hello, um,I'm from so and so company and
my name is, and he had this,this Indian name, short first
(25:37):
name and super long last name.
And he would kind of say it andstutter and say, I hope I said
that right and just get a littlelaugh out of people.
then, and then he wouldliterally say like, I am a, I'm
a tech nerd, but I'm going totry to be around people now.
And so everyone kind of knew,okay, here's what I'm getting
into, but just for him in thatsetting that worked for him to
(25:59):
be able to connect with people,but whatever your situation is,
find what's going to work foryou and your team.
in these settings.
A lot of founders are like theopposite, right?
They're like the flashy, kind ofgregarious, like, hey, I could
talk to, you know, dry, youknow, dry paint on a wall and I
could carry on a conversationwith the Chia pet type of thing.
So, um, sometimes it's theopposite problem, but I would, I
(26:22):
would definitely agree.
Just make yourself prepared andmake it so it's polished for,
uh, for your audience.
All right.
Final call for valuationmethodologies and going into
this.
Dramatic spreadsheet, TV soapopera deal.
Ed (26:40):
Um, you know, I, I know poor lead parts having technical
difficulties, which is
Emily (26:46):
We've got to see his dog though, on his couch a couple of
Ed (26:48):
We did.
That was, that was prettyawesome.
Um, the, uh, the, the biggest,the biggest thing, and we, we do
have stories.
We didn't get to tell thembecause Rory is the best
storyteller of the bunch.
Um, and so we, we didn't get alot of stories, but I will say
this, the valuation piece as itgoes, as you go through that
process is setting the table forthe entire P.
(27:08):
E.
hold period, because the onlyway they make money is If they
make money on the investment andmost of the money in the
investment most They'll tell youit's in the execution, but it's
like anything else you make mostof your money on the buy and so
they'll The, that by valuationis absolutely critical for the
private equity piece.
And if they overvalued,regardless of how nice a guy you
(27:32):
are, how nice a gal you are,they are going to get very
irritated if they figure outthey overpaid and they're not
going to hit the return hurdles,even if you're doing fine.
Um, but fine isn't fine enoughfor them.
And the, on the flip side, ifthey underpay, they're going to
be ecstatic and you're going tobe irritated.
So there is a, there is a kindof a fine point of, you know,
(27:56):
trying to get to the rightanswer.
Um, like I said, most of thedeals that I've had to go into
are ones that were just grossly,like the last one was just
grossly, grossly valued, grosslyoff.
Um, I'm not going to saymisrepresented.
I don't want to get in trouble.
I would just say the valuationwas significantly higher than I
would have paid for it, but soare most private equity
(28:19):
transactions.
And you end up spending a lot ofyour time trying to scramble to
get the return that the, thatthe, was underwritten
originally.
Um, and I'm dealing with anotherone of those right now.
Um, where we, I did thevaluation, the valuation as
underwritten, and then I showedwhat the valuation is today, and
it was a, uh, a very eyeopening.
(28:41):
Um, presentation for the privateequity folks as to what just a
couple changes and assumptionsum, over the last two years have
done to their investment thesis.
So those are the kind of thingsthat, you know, that initial
valuation is going to set thetable for the entire hold period
and set a lot of the attitudesand emotions during that hold
(29:04):
period.
So, just be prepared and that'sprobably the most critical piece
of the hold period.
Entire deal process is gettingthat valuation, right?
Emily (29:15):
Set the table right.
That can be our takeawaymessage.
I was trying to think ofsomething clever for like a, for
like a reality show.
The only thing that's coming tomind is like the bachelor
because that's what I watched incollege.
Um, but, uh, less tears, moreroses.
We'll leave it with that.
There we
Ed (29:32):
Beautiful.
Emily (29:33):
We'll catch you next time on the private equity experience
podcast.
Imagine this.
You have built a company fromscratch, and you have put your
blood, blood, sweat and tearsinto this thing, and you have a
potential buyer at the table,but the stakes are super high,
and this could be a lifechanging event.
How do you structure this deal?
What types of things do you needto consider, such as valuation,
methodologies, post transitionpieces, all of that good stuff?
(00:57):
So we're going to dive into thisin this episode, and We have
some stories.
Some of them are good.
of them are different.
But, uh, we've, we've seen thisfrom, from multiple
perspectives.
Ed (01:13):
And I think even more than the art and science, there's a
lot of emotion that people claimas art and science in the, in
the, in the, both the diligenceand the valuation phase of the,
of the business.
Emily (01:27):
Well, I think if people go in and like, are trying to do
like fine tune brush strokeswith like paint within the
lines, they end up doing likeabstract art where they just
spew the.
Paint can across the canvas andbecause they get into it, it's
like their baby and they get sotied up
Ed (01:42):
Well, and it depends.
I mean, I think Rory and Iprobably could use it, you know,
kind of stretching that analogy.
There's been some that have beenlike crayons.
I mean, it's, it's not evenpaint.
It's not brushstrokes.
It's, it's fricking crayons.
And I've, I've, Interestingly,those are largely the ones where
I've been called in to turn themaround because I look at the
valuation.
(02:03):
How did you get there?
And you know the the PE guystend to get and they've been all
guys by the way.
I have yet to find a Roy and Ihave worked with a couple women
in PE and they they've tended tobe less Um, a motive on their,
on their approach to things andthey, and probably more
(02:24):
effective candidly.
Um, but the, all, all the guyshave been like, Oh no, there's
this great opportunity.
And it's, and a lot of it's piein the sky, you know, total
addressable market, Tam, you'llhear that.
Uh, yeah, it's spreadsheet stuffand the reality just doesn't
match.
And I'm like, how did you get tolike 32 X EBITDA for this
business?
Emily (02:44):
a private equity deal, like a deal is like where
spreadsheets meet like a soapopera TV reality show drama.
Ed (02:52):
This is honest to God truth.
that's a, that's the best wayI've ever heard it described.
Yep.
so founders will ask you like,so what's my company worth?
They have a number in their mindalready.
It's like, it's like somebodygoing to the real estate agent.
We use this analogy in the bookand I use it a lot because each
one of these businesses isunique, just like a piece of
real estate.
When you go to sell your house,You, you've done the comps,
(03:15):
you've looked on Zillow, you'relike, I know that this house is
worth, is worth 800, 000.
And then you go to the realestate agent, they're going to
give you a range, and if thatrange doesn't meet your
expectation, you're likely tofind a real estate agent where
that range does meet yourexpectation.
And that, and part of this roleis the investment bankers are
supposed to help you withvaluation value, setting the
(03:39):
expectation as part of theirjob, but they don't get to do
that part unless they get theengagement.
And so there's, there issometimes the You know, when
they're talking to you about theengagement, they'll go, well,
just like a real estate agent.
Well, well, I think this is aunique, unique business and it's
worth block.
And then they get in there andthey go through that.
And we've talked about this afew times that preliminary
diligence and are helping youset up the data room and they're
(04:00):
looking at all this stuff.
They go, well, you know, we, wewere identifying some issues and
they may reset you.
Um, but the investment banker'sjob is to bridge the.
The perception and the realitypart of it, I guess, investment
bankers have a tough job.
Um, but one of their jobs is tobridge the perception of reality
to expectation on valuation andhelp get that deal across the
(04:25):
finish line by getting the priceup on the buy side and getting
the price down and expectationeffectively set on the sell
side.
the other part is, what's thequality of that revenue.
And one of the key components isthe ability to, um, not only
(04:47):
predict, predict that revenue,but also recognize that revenue
properly.
And a lot of the businesses thatwe've been associated with.
Um, you know, and I'm, and I'mthinking all, I'm thinking like
in Rory's case, the, thebusinesses that were, um,
specialty finance related.
So like the B lines of theworld, um, and the, the business
(05:08):
that we worked in together atthe fusion zone, we all had
issues around revenuerecognition.
So you had deferred revenueissues.
You had, you know, when was therevenue recognized, how much,
how much in each period.
And so those become.
Um, areas where duringdiligence, if your, if your
business is generally valued ona multiple of earning or a
(05:29):
multiple of revenue, thoserevenue recognition policies are
going to come under intensescrutiny, um, cause it's really
driving the business valuationand you're going to want to have
some of those elements dealtwith, with your accounting team
before you you know, before,before you go to market so that
a lot of those issues end upresolved.
Emily (05:51):
Yeah.
So let me, okay.
So we've talked about a lothere.
So there's revenue, so there'srevenue and EBITDA, there's the
two big valuation methodologiesjust like to keep it simple,
like big buckets within revenue,which seems relatively
straightforward, which is like,take your revenue amount and
say, okay, what are people inyour industry?
(06:12):
In a similar category projectingor, or doing, um, and there's
lots of nuance in there.
So recurring revenue, I rememberwhen we worked together at a
company we worked at G2, I wasin charge of the client
management team and you bothtold me, Emily, have your team
(06:34):
members people.
Extended or renewed on these onthese certain types of
contracts, which were likelegitimate contract.
They were just for a longerterm, but we would kind of give
in certain places because wewanted the longer term
contracts.
And now and you were explainingit to me.
But now I know, you know,having.
Had my career now.
I understand like, Oh yes,because we wanted to be able to
(06:56):
say predictably we have thisamount of revenue under contract
when we were going out fordeals.
And so that there was, that wasjust for my department, my
client management department.
There were other things we weredoing across the company with
sales and operations andeverything like that, but that's
an example of the nuance.
And the other thing youmentioned, Ed, which I think
(07:16):
just giving these examples isgood.
So people can hear about thedifferent kinds of things we're
talking about is let's just saythat we are both aware of an
occurrence where revenue was.
Was counted in two places,meaning there were a couple of
different areas of the businessand subsidiaries and different
entities within an umbrellabusiness.
(07:39):
And revenue from a product linewas counted in two places.
And that was, that was, uh,somehow missed and later found
out, and that was a problem.
So revenue recognition and howyou calculate things and
structure things, um, isabsolutely under.
Scrutiny in that first revenuecategory.
And then for the second bucket,which is EBITDA, let me just
(08:02):
break this down to make surethat I get it.
And our listeners get it.
Um, earnings before interest taxtaxes, depreciation,
amortization, which is basicallylike a fancy way of just
removing all of those big, likelong term things like, uh, Make
like debt like loans and longterm amortization for like
(08:25):
equipment for like 20 year longtype things where you're taking
a little bit, uh, year over yearfor 20 years.
If you have like, I don't know,a tractor or something or
certain computer equipment hashas these calculations you do.
So you're removing all of thosetypes of things and talking
about cash flow and operatingcash flow.
And then you're doing thesimilar process, right?
So you're saying, okay, forcompanies in my industry,
(08:49):
similar, similar to, um, thetype of company we are, here's
the type of deals that they'redoing.
And here's the type of EBITDAprojections.
they're making.
Is that, is that what we've saidhere in our examples?
Ed (09:04):
Yeah, that's, that's, that's basically correct.
Your, your EBITDA is oneelement, but you normally have
what, and you kind of alluded toit, adjusted EBITDA.
So you've got EBITDA, which isEarnings Before Interest, Taxes,
Depreciation, Amortization.
Those are straightforward addbacks.
And then people like to
Emily (09:24):
is where you can get creative.
Creative.
You can get artistic.
Ed (09:27):
Yes, that's, that's, that's could be Pablo Picasso right
there.
Emily (09:31):
You can be Picasso.
You can finger paint.
You can do interpretive dance,
Ed (09:37):
Jackson Pollock is probably closer to what I've seen in most
of the, most of what I've workedwith.
But yeah, it's, and theintention.
I mean, again, this is a, it's,it's not a secret, but the
intention is most everybodygoes, you get these one time
things.
So you want to take all the onetime good things and say that
they're going to keep happening.
You want to take all the onetime bad things, or even some of
the things that happen once in awhile, and say that they're one
(09:59):
time, and you put those intoyour adjustments column.
So you adjust your revenue up,you adjust your, your, um,
expenses down, and theneverybody will look at that.
And most of the time, discountthe one times.
The, the sellers, the, the, thefounders will tend to pound on
the table and go, you know, thisis absolutely one time and it's
(10:23):
never going to happen again.
And, you know, it was a tax, itwas a tax event or whatever.
But that, that's where a lot ofcreativity comes in on adjusted
EBITDA.
Emily (10:32):
but here's like an interesting part.
So all of these are relative topeers in your Industry.
Ed (10:41):
Mm hmm.
Emily (10:42):
And so I think a lot of people get confused on like the
absolute value, like the number,which I mean, like, I'm trying
to think of an example, likemaybe when you're looking at
like stocks or ETFs or somethingwhere like there's certain
ratios that you look at on thetechnical side, we're like,
okay, that's the number, but itmeans nothing unless you have it
in context
Ed (11:02):
Right.
Emily (11:03):
its category.
So like relative to what, so Ithink it's important to.
Consider that like that's alwaysgoing to be involved or included
at some level in the valuationprocess.
Ed (11:13):
Yeah.
And, and the other, the otherpiece to keep in mind is
valuation headline number is notnecessarily real valuation.
So a lot of times you'll get,and I, I know we talked about
this in the book.
I think we've talked about thison these, on these pods too,
where you're like, well, youknow, they might say they're
offering you a hundred million.
And, you know, when you'regetting your indication of
(11:34):
interest in to gate folks to thenext round or even choose your
final diligence partner to kindof go through process with.
When you look at the actual dealstructure, it might be 75
million or 65 million in cashand then an earn out and then a,
you know, a bunch of contingentpayments or contingent, um, a
(11:55):
basket for, um, liabilities.
And so the entire deal structureneeds to really be analyzed to
figure out what the trueeconomics are.
Because you could say, well, I'mgoing to give you, you know, 10x
EBITDA, which is, you know, Sotwo turns or two more times,
eight, eight X versus 10 X wouldbe two turns, two turns more
(12:16):
than any of the other, any othercomponents.
But then you end up with, youknow, some onerous deal terms in
there that make it almost applesto apples.
It's just, you know, when youstart setting them apples to
apples and showing your cashflows and your present values
and all those things, it's, andthat again, is something that
both the internal team, so theCEO, CFO, As well as outside
(12:40):
counsel, outside advisors andinvestment bankers need to kind
of show apples to apples on theterm sheets or force everybody
into a equivalent term sheet inorder to be able to evaluate.
Emily (12:53):
and so if you're, if we're talking to like a founder,
like my general approach is getevaluation you think is accurate
and fair.
And then also there's like thepersonal piece, which is like,
what does this deal need to looklike for you personally?
And if you've got those two bigrocks, then you're probably
going in the right direction.
(13:13):
Would you add?
Ed (13:15):
yeah.
And again, we've mentioned thisnumerous times, know what you
want when you go into thetransaction, why are you going
in?
And if it's like, no, I'm tryingto get some money off the table,
try to diversify my holdings,but I still want to work for
another seven years.
And I've, you know, reallylooking forward to the bite of
the apple, et cetera.
Optimizing your purchase pricemay not be.
May not be the right answer.
(13:35):
Maybe, hey, can I, can I workwith these folks for the long
haul because that's my goal tobuild value in this business
and, you know, get enough offthe table to make it, make it
worthwhile.
You go with the, I'm getting thehighest headline price, or I'm
trying to optimize my incometoday.
You may end up, if you can'twork with those folks, it's not
going to work.
(13:55):
You're going to end up out.
This is not as if they've gotcontrol.
You're not you're not gonna behappy and you're gonna be
wishing that you had Taken thelesser deal with the folks that
you you jive with Mm hmm
Emily (14:13):
myself and I'm just going to exit this and that's my plan.
So if that's your plan, thenit's like, okay.
And we've, I, you know, we'verun into founders who like say
they care about their teams anddo that whole talk track.
And in reality, they're out forthemselves.
And so, know, that, thatscenario does exist where it's
like literally how big can Imake my personal number?
(14:33):
I don't really care whatleadership is in place
afterward.
Um, I'm going to get mine.
And so like you have all thesedifferent equations or
different, uh, of intendedoutcomes that you're looking
for.
So know that, and we have talkedabout that in the past.
How do you know if you'regetting an accurate and fair
valuation?
If you're like, this is my firstrodeo, like I have an investment
(14:54):
banker, I think this seemsright, like gut check wise, but
I'm kind of basing this on, youknow, not a lot of foundation
here.
What's the best way for someone
Ed (15:04):
You need to have done your homework going into it And once
you've, looked at what the compsare and you've talked to
multiple investment bankers andgotten them to give you feedback
as to what your company's worth.
And again, the other thing thatwe've said over and over again
is that choosing your set ofadvisors, your investment
bankers, your accountants, yourattorneys, that's not, it should
(15:27):
not be a one and done process.
That should be a little bit of alittle bit of a beauty contest,
some interviews, ask those kindsof questions, get some, you'll
get some consensus around whatthe valuation is.
And if you're off thatvaluation, you should understand
why.
high or low, um, going into thattransaction.
And so that's your, the best wayto know it's a good deal or a
(15:47):
fair deal on a valuation side isto have really set those
expectations or have gotten, youknow, a set of expectations from
various sources and then be ableto triangulate that against the
term sheets you're trying toevaluate.
Um,
Emily (16:04):
or three investment banks, or would you suggest an
investment bank and otherentities that would provide
evaluation?
Ed (16:11):
so when you're going through choosing who your investment
banker is going to be, that'sone of the questions you should
be asking is, what do you thinkthe company is worth?
How would you go about coming upwith a valuation?
What are the key drivers tovaluation?
And are there anything, or isthere anything we should be
doing now, between now and whenwe go to market, or between now
and when you buy?
(16:32):
when you, uh, when we get intonegotiations that would help us
improve our valuation or improvethe perception of the business
to potential buyers.
That's so you'll choose oneinvestment banker.
Once you've chosen an investmentbanker, you're basically mated
for the purpose of that, um, forthe purpose of that transaction.
(16:52):
So you're not.
I mean, you can go out and getand pay for, and you're going to
pay for, um, additionalvaluation, uh, information if
you want to have a businessvaluation expert or somebody
like that come in and validateyour offer, um, and that's an
option, especially if you feellike it's, if you just aren't
feeling right, there are folkswho specialize in business
valuation, um, CPAs and othersthat Um, a lot of times for
(17:16):
estates or, or tax issues sothat that way with, with audits,
um, to set values.
Um, so that's something you cando to, to check it, but in, in
general, you should have a goodidea and do that prior to going
to market.
Emily (17:31):
So, so do your research is a, is a huge one.
And then in the investment bankvetting process, you ask them
these types of questions abouttheir approach to valuation and
kind of what they see.
And then you choose aninvestment bank.
Now, just to be clear, are we,are you saying spend the money?
(17:52):
With two or three to get like anactual
Ed (17:54):
No.
So, so yeah, you just ask him.
It's kind of like choosing areal estate agent.
So they're, they're normally aninvestment banker.
They may have some retainers.
So some portion that's, youknow, pay to play.
Um, but most of them, they maketheir money on a percentage of
the sale price and the higherthe sale price and more they
make just like a real estateagent does.
(18:17):
So during that interviewingprocess, they're going to want
to.
Get that business, and that'sthe time to ask a bunch of those
questions.
Emily (18:25):
How would, so as part of that vetting process, do they
give you like a rough estimateof like how they would value the
company?
So you have like three numbersto compare.
Ed (18:35):
And you should be asking that question, and asking what
the drivers are, and asking howthey came to that
Emily (18:40):
So they might not be able to like the deep, deep, deep
dive until they get in, buteveryone in that phase of things
should be able to give you aestimate.
If you're like, okay, likewhatever, uh, three or like four
out of five.
Are in this general range andthis one's kind of known for
being aggressive or whatever acreative Um, that might be one
thing if you're like whole likei'm getting like five different
(19:01):
answers here or you know Bestout of three type of thing.
That's a
Ed (19:05):
I don't have an IB pitch book here, I don't think, and
even if I did, I probablyshouldn't share it, but I, a lot
of times when I've had an IB'spitch, they actually will give
like a sheet of here's Like thelast, in the last 24 months,
here's all the companies thatare close to comp that have
transacted.
Here's the seller, here's thebuyer, here's the valuation,
(19:27):
here's the almost like you wouldget, again, in real estate,
here's all your comps, and thisis how we're coming up with how,
how we would, we think yourcompany's going to be valued.
So they'll have done, they,there's companies like PitchBook
that track all these, uh,transactions, and then the
investment bankers, PE guys, allthe, all these folks that, Rely
(19:48):
on this information, pull thatinformation out, and it's
available for your use.
And if you get three investmentbankers, I'll put, I'll put, you
know, a buck on the fact that80% or 90% of the deals that
they show you on the comps aregoing to be laid out that way.
And they're gonna be the samedeals with the same calculations
(20:08):
and same multiples revenue,EBITDA multiples.
Emily (20:11):
so it seems like you know this If we zoom out, this
overall trend of having publicinformation on things like
Zillow and Kelly Blue Book andPitchBook, you can do a lot of
this research yourself now,which is great.
Still need kind of a specialistonce you get into fine tuning
and get serious about things,but there, there is that
(20:32):
information out there thatpeople should be looking at.
Ed (20:35):
Yeah, and, and the other, the other part, um, is there
the, the underlying componentsof like how fast are you growing
and, and, or how fast were theygrowing and what are the other,
you know, kind of subjective oreven mathematical and growth in
the case of growth, discountrate, interest rate at the time
of which those transacted areall going to be.
(20:56):
Inputs into how they are valued.
So don't take any of that asgospel.
It's broad range But it shouldgive you an idea and you should
be able to triangulate a bunchof those things into a yeah My
company should be worthsomewhere in here And if you're
going through the process andyou start falling outside of
those ranges upper or lower Youshould be asking yourself Why
don't just get excited becauseyou're falling out you're
(21:17):
falling into the upper side ofthe range Understand why you're
falling into the upper side ofthe range Cause it may be an
expectation that's that you'resetting or that especially if
you intend to remain that you'resetting that you're not going to
be able to hit if you'reshowing, you know, quick growth
that, you know, is going toplateau you.
That might be a good reason tosell the business.
It might not be a good reason tostay in the business.
If you know that you're going tohit a plateau and you know,
(21:39):
folks are buying on a, no,that's going to continue to
infinity type of type of thesis.
Emily (21:45):
Okay.
So we've covered a lot of groundhere.
We've talked about, um, revenuevaluation methods, EBITDA
valuation methods, know your whyand know what you personally
want to get out of this.
We've talked about investmentbanks and getting a couple
different perspectives there.
Um, is there any other?
And you've talked about themarket conditions.
We're like, hey, interest ratesand things like that.
(22:07):
Are there any other majorconsiderations where it's like,
okay, if someone's about to gointo this part of the process
for real, make sure they've gottheir ducks in the row over
here.
Ed (22:17):
Yeah, I'll, I'll touch on it.
And Rory has used the.
term corporate hygiene, which Ithink is a little skeevy.
Um, but
Emily (22:26):
It means take a shower in
Ed (22:28):
yeah, but the, the reality of it is a cleaner, your books
and records are the betterpresented.
Your models are the betterorganized your, your, um, The
more your team has rehearsed themeeting so that they riff off
each other well, that all goesinto valuation.
(22:50):
Those are all the subjectivepieces.
And yeah, I teach finance, um,at local universities.
So I, I, you know, a lot of itis math and Rory talked about
the math, but the key on, oneven on the math for the math
nerds, the, the, you've got arisk free rate and a risk
premium.
Yeah.
And so you, the sum of those twois what you discount your
(23:12):
expected future cash flows at.
And you know, Rory kind of hiton that with the EBITDA piece.
That risk premium comes down ifthere's a perception that this
is a less risky trade becauseall this stuff seems really
wired tight.
And so I'm, there's lessunknowns and less unknown,
unknowns, known unknowns andunknown unknowns.
(23:35):
It's my friend Don Rumsel wouldsay.
And so when your discount ratecomes down, your valuation goes
up.
And so as a result, going intothis, Make sure you've got your
books, records, virtual dataroom, pitch, all that stuff down
cold and it looks right and it,and it is right so that you
don't raise risk flags, whichwill then drive the risk premium
(23:57):
up and then drive your valuationdown.
Yeah.
Hmm.
Emily (24:08):
For people to come look at it.
Cause if you just have an emptyroom, it's like, okay, like the
math works out that it, uh, butthis is just like a bare, empty,
gross room.
Whereas if you're like, Oh, likethe sofa could go here and
here's the fireplace and here'show you could make it look, uh,
interior, uh, decorations.
And it was funny.
I had a.
a coaching client who was afounder, original founder and
(24:29):
CEO of a successful businessgoing out for their next round
of funding.
And he was like a nerd throughand through, just like a
technical nerd who could code,who was a genius.
Um, and yes, he was from India.
So he just like hit all thestereotypes and everything.
And he, um, was having trouble.
(24:51):
Giving his pitches to investorsbecause he was just such a
technical nerd.
And so, uh, we worked on acouple of different things, but
one, one is like speaking at alevel that your audience is
going to understand.
So having that like polish, butalso understanding where your
audience is coming from and thatfine balance between delivering
information that is relevant andhelpful to them.
(25:13):
That's at their level withoutbeing condescending.
So kind of threading thatneedle.
But he was such a nerd that youcouldn't get over the fact that
he like, Oh my gosh, like thisis not what we call a people
person.
He just would nerd out onthings.
So we made a joke.
So I said, okay, open it likethis.
Like open it like, hello, um,I'm from so and so company and
my name is, and he had this,this Indian name, short first
(25:37):
name and super long last name.
And he would kind of say it andstutter and say, I hope I said
that right and just get a littlelaugh out of people.
then, and then he wouldliterally say like, I am a, I'm
a tech nerd, but I'm going totry to be around people now.
And so everyone kind of knew,okay, here's what I'm getting
into, but just for him in thatsetting that worked for him to
(25:59):
be able to connect with people,but whatever your situation is,
find what's going to work foryou and your team.
in these settings.
A lot of founders are like theopposite, right?
They're like the flashy, kind ofgregarious, like, hey, I could
talk to, you know, dry, youknow, dry paint on a wall and I
could carry on a conversationwith the Chia pet type of thing.
So, um, sometimes it's theopposite problem, but I would, I
(26:22):
would definitely agree.
Just make yourself prepared andmake it so it's polished for,
uh, for your audience.
All right.
Final call for valuationmethodologies and going into
this.
Dramatic spreadsheet, TV soapopera deal.
Ed (26:40):
Um, you know, I, I know poor lead parts having technical
difficulties, which is
Emily (26:46):
We've got to see his dog though, on his couch a couple of
Ed (26:48):
We did.
That was, that was prettyawesome.
Um, the, uh, the, the biggest,the biggest thing, and we, we do
have stories.
We didn't get to tell thembecause Rory is the best
storyteller of the bunch.
Um, and so we, we didn't get alot of stories, but I will say
this, the valuation piece as itgoes, as you go through that
process is setting the table forthe entire P.
(27:08):
E.
hold period, because the onlyway they make money is If they
make money on the investment andmost of the money in the
investment most They'll tell youit's in the execution, but it's
like anything else you make mostof your money on the buy and so
they'll The, that by valuationis absolutely critical for the
private equity piece.
And if they overvalued,regardless of how nice a guy you
(27:32):
are, how nice a gal you are,they are going to get very
irritated if they figure outthey overpaid and they're not
going to hit the return hurdles,even if you're doing fine.
Um, but fine isn't fine enoughfor them.
And the, on the flip side, ifthey underpay, they're going to
be ecstatic and you're going tobe irritated.
So there is a, there is a kindof a fine point of, you know,
(27:56):
trying to get to the rightanswer.
Um, like I said, most of thedeals that I've had to go into
are ones that were just grossly,like the last one was just
grossly, grossly valued, grosslyoff.
Um, I'm not going to saymisrepresented.
I don't want to get in trouble.
I would just say the valuationwas significantly higher than I
would have paid for it, but soare most private equity
(28:19):
transactions.
And you end up spending a lot ofyour time trying to scramble to
get the return that the, thatthe, was underwritten
originally.
Um, and I'm dealing with anotherone of those right now.
Um, where we, I did thevaluation, the valuation as
underwritten, and then I showedwhat the valuation is today, and
it was a, uh, a very eyeopening.
(28:41):
Um, presentation for the privateequity folks as to what just a
couple changes and assumptionsum, over the last two years have
done to their investment thesis.
So those are the kind of thingsthat, you know, that initial
valuation is going to set thetable for the entire hold period
and set a lot of the attitudesand emotions during that hold
(29:04):
period.
So, just be prepared and that'sprobably the most critical piece
of the hold period.
Entire deal process is gettingthat valuation, right?
Emily (29:15):
Set the table right.
That can be our takeawaymessage.
I was trying to think ofsomething clever for like a, for
like a reality show.
The only thing that's coming tomind is like the bachelor
because that's what I watched incollege.
Um, but, uh, less tears, moreroses.
We'll leave it with that.
There we
Ed (29:32):
Beautiful.
Emily (29:33):
We'll catch you next time on the private equity experience
podcast.
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