Overvaluing a company to sell?

[Roparadise]

Is it legal to overvalue a company when going to sell it or a part of it? Like how facebook is doing.

 

[meathead1234]

The market sets the value, not Facebook, lol.

 

[Roparadise]

The market sets the value, not Facebook, lol.

I know the market sets the value,but sometimes they are deluded,there is no way a company like facebook should be worth 2.6x more then a company such as the Southern Company (NYSE:SO). Does it just come down to good marketing and press about your company to be able to sell it for more then what it should?

 

[TNphoneman]

It comes down to people willing to pay more.

You can set the value of a company at whatever you want. It does not mean that you are going to get it though. Most of the outrageous pricing is because of emotional attachment.

 

[meathead1234]

I know the market sets the value,but sometimes they are deluded,there is no way a company like facebook should be worth 2.6x more then a company such as the Southern Company (NYSE:SO). Does it just come down to good marketing and press about your company to be able to sell it for more then what it should?

I think it's overvalued too, but unfortunately it doesn't really matter what I think

As far as I understand, it's all about having a good story and "potential" for future growth. Some would argue Facebook is under-monetized and that they could exploit that further. The data they hold on people is also extremely valuable - they basically have complete visibility over the lives of 100s of millions of people and being online can easily adapt to new trends. Having a good banker also helps - and being Facebook the IPO naturally got a ton of publicity.

 

[brainstorm1]

Come on guys. Setting yourself up for overvaluation is all about MARKETING. Should be fairly obvious to this bunch

 

[DarthM]

Meathead is absolutely right. What the market thinks is what counts, not what you show as your valuation. When raising capital, you need to make your valuation look credible.

I used to work for a firm that was raising further rounds of capital from venture capitalists (it had already successfully raised some capital). I was responsible for creating the valuation model, which consisted of pro-forma financial statements under various growth assumptions. Of course, we could've designed the model to show a valuation of $1bn, but we knew that realistically, we'd get around $3m for a 10% stake ($30m implied value), so I tweaked my model to show a $30m valuation. The model and all of it's assumptions needed to look realistic, since the VC's inevitability challenged the model. We had to show that we made revenue of X% in the previous year, which caused expenses to rise by Y% (since more employees, marketing etc are required), and the growth is forecasted to be Z% over the next few years, etc. The firm ultimately did raise the $3m for a 10% stake. The message is, even though it wouldn't be 'illegal' for me to come out with a $1bn valuation for the firm, the VC's would've been totally unconvinced and simply laughed at the model's spreadsheet if it didn't look credible, and obviously wouldn't have provided any capital.

 

[bakxos]

Well truth is that Facebook is highly overvalued when you use the profits that they generate to assess their value. Yahoo was more profitable if I remember correctly.

Such companies are a bit hard to value because they lack tangible assets or to be more accurate they have a lot of intangible assets.
The markets do not always use the same metrics to price things and of course are not always correct. An example is the dot com bubble.

Facebook though is not only about profitability. Its the data that it has in its disposal and how famous and widespread it is that makes it an attractive investment. They have free advertising anytime they want and they can create trends.

 

[bakxos]

Meathead is absolutely right. What the market thinks is what counts, not what you show as your valuation. When raising capital, you need to make your valuation look credible.

I used to work for a firm that was raising further rounds of capital from venture capitalists (it had already successfully raised some capital). I was responsible for creating the valuation model, which consisted of pro-forma financial statements under various growth assumptions. Of course, we could've designed the model to show a valuation of $1bn, but we knew that realistically, we'd get around $3m for a 10% stake ($30m implied value), so I tweaked my model to show a $30m valuation. The model and all of it's assumptions needed to look realistic, since the VC's inevitability challenged the model. We had to show that we made revenue of X% in the previous year, which caused expenses to rise by Y% (since more employees, marketing etc are required), and the growth is forecasted to be Z% over the next few years, etc. The firm ultimately did raise the $3m for a 10% stake. The message is, even though it wouldn't be 'illegal' for me to come out with a $1bn valuation for the firm, the VC's would've been totally unconvinced and simply laughed at the model's spreadsheet if it didn't look credible, and obviously wouldn't have provided any capital.

So you were working for a firm that it was doing its own due diligence and people were investing millions in it? Due diligence is only valuable if its impartial thats the reason there are professional firms that do that. You cant value yourself and wait for the millions to start flowing it...If it was that easy, I would like some too. I am good with excel.

 

[DarthM]

So you were working for a firm that it was doing its own due diligence and people were investing millions in it? Due diligence is only valuable if its impartial thats the reason there are professional firms that do that. You cant value yourself and wait for the millions to start flowing it...If it was that easy, I would like some too. I am good with excel.

Where did I say that we did our own due diligence? The firm (a financial broker) wasn't doing it's own due diligence. It had already raised some finance and was seeking further rounds of capital. We provided our valuation to the VC's, and they obviously performed their own due-diligence and valuation before investing.

When you raise capital, you don't just walk up to investors without any figures. You give them your figures (e.g. estimated growth, profit, etc) and they perform their own due diligence, and if they're happy, then you might get an investment.

You sound surprised that people invested millions in it. In fact, it already had over a million at STARTUP stage due to FSA capital requirements as a derivatives broker. It was founded by a former director of investment bank Merrill Lynch (now BoAML).

 

[djc225]

Exactly. I was also a financial analyst in a former life and prepared all sorts of similar models and valuations. Those that the company and their bankers provide are only first drafts to start discussions. Every single potential buyer is doing their own model and then second guessing the assumptions and estimates made by the seller. Same thing here with facebook. The buyers all put together their own projections and determined that it was worth their investment.

 

[Roparadise]

@darthm

Do you provide valuation services?

 

[DarthM]

@darthm

Do you provide valuation services?

Not privately. My valuation work was while working for a firm, as part of my professional work. And any valuation model would need to look credible in order to interest VC's.

If you're interested in company valuation, read up on pro-forma financial statements and discounted cash flow (DCF) analysis. I learned these things through my studies (as I have a masters in finance), but you can still learn it yourself if you're interested in this topic.

 

[Nigel Farage]

People use the idea of monetary "value" as if it is something that exists as a standalone entity with no connection to anything else. Some central authority can just up & decide that something is worth "X" and everyone that wants it is going to pay "X". Something is worth what someone is willing to pay for it, and not one penny more or less. The recent Facebook Flop (which I enjoyed) illustrates this. There is no marketing in the world that can force someone to pay more than they want, and the "experts" are frequently people that are paid to sound like they know what they are talking about, even when they are wrong and what they are saying is stupid. Now Facebook is competing against all of the other publicly-traded companies as money-making propositions, and it's my prediction that it is the beginning of the end for Facebook. The gloss only lasts so long on the paint, and that new car smell eventually fades. Pretty soon that car is a piece of shit just like any other, and you can put lipstick on a pig if you want, but it's still a pig wearing lipstick. You kiss her, if you think all those experts know so much. Another thing about Facebook is that people will only put up with so much shit before they say fuck-you and move on to something else. Facebook is the new MySpace, and MySpace was the new AOL. And Zuckerberg is the most un-charismatic pole-sucker on the planet, so there's another minus to consider.

What a lot of stupid people never consider is that hype has a negative effect. Some people see a lot of idiots running around hyping-up something-or-other and make a firm decision to have nothing to do with it. If it was worth a shit, why would they put so much effort into the hype? Most value is self-evident, or can by described calmly in simple, easy-to-understand language. Usually the purpose of the drama is to hide the absence of any describable value. They gave Obama the Nobel Peace Prize.

 

[coolfx35]

tell me why a piece of artwork can worth $150 million dollars then? shouldn't it be just some piece of paper with some ink on it? To me it's only worth $10 tops.

 

[a32337]

"Market value" valuation is for quoted companies only... Are you listed on the market? It is not best practices to overvalue. Most of the time you will need to PROVE (to any savvy investor at least) you valuation method. If your doing price earnings, asset accumulation, or discounted cash flow, you'll most likely need to prove where you came up with your numbers. If you are making all of those numbers up, I wouldn't recommend it. There are many different ways to value a company.

Is it legal to overvalue a company when going to sell it or a part of it? Like how facebook is doing.