Real-Life Private Firm Valuation Question ask, she, determine, friend, little

tango_gs

My friend owns 5% of an LLC (an used car dealership which has done very well over the last 7+ years and has very little or no debt). “Sarah” wants to sell her share to the majority owner (95%) and wants to know how much should she ask for it.
I’m thinking that Sarah should determine the value of the firm as per capitalized cash flow method (Level II Equity, page 546). I have two questions:
1) Is the capitalized cash flow method suitable in this case?
2) If yes, should she ask for a price close to 5% of the value of the firm obtained using the above mentioned method or there is some other rule of thumb?
Any feedback is appreciated. Thank you!

mfleming1983

Great question! No, there is no such valuation agreement.

pennyless

Thank you.

JPSem

To add on to higgmond’s comments, and this is in a way an issue of size as this poster already mentioned, but I would advise your friend to also consider the diversification (or lack thereof) of the subject dealership. Publicly traded dealerships are likely to operate multiple locations, whereas if the subject entity is just a single location, there could be a sizeable discount that is appropriate.

Gypsy

if she’s trying to sell her share, obviously she wouldnt want to apply any of these “discounts” mentioned earlier. we’re not preparing an IRS filing, are we? she’ll need to apply a multiple and capitalize the cash flow, then stop there and forget about obscure discounts that are hard to quantify anyway. be somewhat aggressive with the valuation without being ridiculous, the rest is negotiation.

disiz64

Probably determining the company value by applying market multiples and having the result discounted for lack of control, liquidity and diversification is a reasonable thing to do. Would a 30% discount be appropriate?

lc26mizzou

Thanks Higgmond.

Roflnadal

Sunshine4ever wrote:Thanks Higgmond.

Always happy to help. I have to get my 1,800+ AF points back somehow.

eagles_dare13

I value privately held companies like this all the time at work, mostly related to estate tax filings, eminent domain, shareholder disputes, and sometimes even transactions.
For a car dealership with under $10M in annual revenue, I would try and get transaction data for other dealerships around that size. Pratt’s Stats and BizComps databases could be good resources, and they may have free trials available - I don’t know. Public company multiples may not be applicable in that scenario - they are just too big.
I wouldn’t bring up the discounts for lack of control or marketability either, especially for the purpose of a negotiation.
Lastly - don’t forget the asset approach. Although the company may be “doing well”, often times the indication of value from the earnings is below the value of the assets. This happens a lot with asset or working capital intensive businesses (e.g., a ton of machines or inventory).
Good luck!

noel

5X EBITDA wroteastly - don’t forget the asset approach. Although the company may be “doing well”, often times the indication of value from the earnings is below the value of the assets. This happens a lot with asset or working capital intensive businesses (e.g., a ton of machines or inventory).
Are you saying fair value implied by DCF