How to value a joint venture? venture, someone, please, really

farrukhsadiq

Hi,

Can someone please explain how to value a joint venture (the methodology/mechanics behind it). I would really appreciate it.

Thank you.

strikethree

Really depends on the terms and structure of the JV.

DarienHacker

Best not to comment. Higgmond has a point.

bigredhockey55

yea you'd need to know the terms of the agreement, cash flow waterfall, etc. if you know market terms at the time the deal was signed then maybe you could do a really rough estimate, but i wouldn't rely on its accuarcy.

stalkey

To Higgmond:

Thank you for sharing. Can you maybe go into a little more detail about typical JV structures and how to value them.

To Jbaldyga:

Can you expand on what "typical terms of the agreement" may be? And explain how a cash flow waterfall fits into the analysis?

Thank you guys!

yalo

Divide by 2 hehehehehe

bbtomato

well there is usually some kind of promote structure for the side putting in the sweat equity. The money side will put up most or all of the capital, say 98% and the sweat equity side will put up 2%. Each will earn a preferred return of say 10% on their contributed capital. If there is cash available from the venture after paying off preferred returns, then the sweat equity side will split the cash at a promoted interest, say 20%. i.e. their % interest is 'promoted' from 2% to 20%.

....at least that how it works with real estate JVs where an investment manager will JV with a developer. Not sure if this is the typical structure in other industries. It depends on how much capital each side is contributing and who is managing the day-to-day work of the venture.

In any case, you need to know how the cash available from the venture is split between the JV partners.

grharmeyer

jbaldyga Wrote:
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> well there is usually some kind of promote
> structure for the side putting in the sweat
> equity. The money side will put up most or all of
> the capital, say 98% and the sweat equity side
> will put up 2%. Each will earn a preferred return
> of say 10% on their contributed capital. If there
> is cash available from the venture after paying
> off preferred returns, then the sweat equity side
> will split the cash at a promoted interest, say
> 20%. i.e. their % interest is 'promoted' from 2%
> to 20%.
>
> ....at least that how it works with real estate
> JVs where an investment manager will JV with a
> developer. Not sure if this is the typical
> structure in other industries. It depends on how
> much capital each side is contributing and who is
> managing the day-to-day work of the venture.
>
> In any case, you need to know how the cash
> available from the venture is split between the JV
> partners.


Thank you kindly for your explanation. How would valuation come into play?

tikfed

BangBusDriver Wrote:
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> I can value a joint!


I concur.

eoin

I generally see JV's in the pharma space. Company A has a product but no salesforce or a product that is outside of it's sweetspot, while Company B has an existing saleforce that is currently selling products that are complementary to Company A's product.

A&B form a JV whereby A contributes the product and B contributes the salesforce. Valuation of the overall JV would be same as any other entity, although you generally would assume that the JV has a finite life and adjust accordingly. Value to either side would depend on exactly how the proceeds are split during the life of the JV.