How do you value your out of home company when you bring in an outside investor? The answer depends on whether you are simply selling an existing share of the ownership to a third party or if you are raising new money to grow the company.
Selling an existing share of your business to a third party
Here’s the valuation formula to use is you want to simply sell a portion of your share in a company to an outside shareholder or if one of your company shareholders wishes to sell to another:
Equity Value = Current assets + going concern value of the out of home business – liabilities.
- Current assets consist of the cash and receivables of your out of home company.
- The going concern value of an out of home company could be the subject of its own essay but for now let’s assume your business is worth 10 times billboard cashflow (revenues less lease costs, maintenance expense, vinyl, utilities and a 10% sales commission). A 10-12 times billboard cashflow multiple is reasonable depending on the growth prospects and quality of your plant and leases.
- Liabilities consist of trade payables and any debt with a claim on the company’s assets.
No let’s suppose an owner wants to sell 20% ownership in a company with $100,000 in current assets, $250,000 in debt and $100,000 in billboard cashflow. The price of the shares should be $170,000, calculated as follows.
Equity Value = $100,000 + (10 times $100,000) -$250,000
Equity Value = $850,000
20% of Equity = $170,000
Raising cash to grow
The math is a little different is you are raising cash to grow the business. Now you compute a pre-money equity valuation of the company and then compute how much of the company the new investors get based on how much money they are investing. Let’s use all the assumptions of the previous case but assume taht you want to raise $300,000 in new equity to fund a new digital billboard.
Pre-money equity valuation = $850,000
New investor is putting in $300,000. This immediately inceases the value of the company by $300,000
Post money equity value is $1,150,000.
The new investor should get 300,000/1,150,000 or 26% of the shares of our out of home company.
What’s subject to negotiation
You can see from the formula that most of the valuation discussions will revolve around what billboard cashflow is and what multiple should be applied to billboard cashflow. Multiples can shift with economic conditions. A good multiple will leave neither side feeling like they’ve been had.
If you need help valuing your business contact Paul Wright at SignValue or Chris Stark and Craig Berry at Stark Capital Solutions.
Have questions about how private equity works? Contact Dave Westburg, davewestburg@billboardinsider.com or call Dave at 206-910-1283.
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