Management forecasts, WACC for startups spark Web discussions

BVWireIssue #149-4
February 25, 2015

Some very interesting discussions are going on in several LinkedIn groups devoted to valuation.

In the BVAN group (almost 9,000 members), a veteran valuation expert is in court and the opposing expert asserts that, if the client cannot or will not prepare projections of future cash flows, then it is incumbent on the appraiser to create and use projections so that a DCF can be included in the appraisal. The opposing side quotes ASA course material as saying: “If the subject company does not prepare forecasts or the prepared forecasts are unreliable, the appraiser should prepare a forecast independently or consider a capitalization model." The appraiser on the other side is not an ASA and needs to know whether that quote is accurate. Turns out it’s not. One commenter provided the actual quote, which says “the appraiser may prepare a forecast.” (emphasis added). The discussion prompted over 50 comments and is still going strong. Says the initiator of this discussion: “I think I created a monster!”

On the BVR LinkedIn page (with over 3,600 members), someone asks advice on what adjustment can be made to an established company’s WACC to identify the WACC of a startup company in the same industry. He asks whether a 30% WACC is too high. One commenter says that a 30% rate is definitely too high: “Venture capital firms in general do not earn even a 30% IRR on their portfolio of deals (including losers), so a 30% required return is too high if you are using proper DCF (with failure probabilities in the analysis).” Another commenter advises that this cannot be easily modeled and he recommends the research done by the Pepperdine private market cost of capital project, where the findings on cost of funds are based on real-world inputs.

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