Google’s recent bid to buy Groupon’s business offers interesting lessons in valuation. Rather than rewrite the story, I want to point you to a finance tutor‘s article on business valuation.

Finance Tutor addresses the article from the perspective of testing the valuation concepts you learn in business school. With their permission, I repost finance Tutor’s article here. This is the second part and focuses on explaining multiples based valuation methods.

Part 2

Valuation Multiples: Groupon’s $6 Billion value using multiples

Our last post on business valuation spoke about how you can approach business valuationusing the discounted cash flow method or the valuation multiples method.  Here we show you how you can estimate the value of Groupon’s business using the multiples valuation method.

Your first task when trying to arrive at a multiples based valuation is to find comparable companies. Comparable companies are similar companies or companies that are in the same business, companies with similar characteristics, growth rates, profit margins, etc. Often it is not possible to get an exact match so picking a company with similar characteristics, growth rates and profit margins is sufficient.

For Groupon, Google itself may be a comparable company to arrive at valuation multiples. Google is significantly larger and but its slower growth rates compensate for the size difference. Apple has shown great growth but is much larger and is not a purely service business. Ebay can be a comparable firm to arrive at valuation multiples too. Lets start with Google.

Sales Multiples (valuation multiple)

According to the NYT, Groupon’s revenue may top $1 billion a year. This is a good place to start.  Google has revenues of 27.55 billion and a business valuation of 149.21 billion (enterprise value) today according to yahoo finance. This works out to a sales valuation multiple of 5.4x (149.21/27.55).

Using this 5.4x sales valuation multiple, Groupon’s business value will be $1 Billion*5.4 = $5.4 billion! This business valuation is in the ball park of the rumored deal price!

Earnings Multiples (valuation multiple)

Google has a PE multiple of 23.23. PE stands for Price/Earnings per share. This indicates that its business valuation is approximately 23.23 times its earnings as Google has very little debt.  If we assume that Groupon has the same profit margins as Google (28.8%), we can estimate its potential earnings at 288 million (28.8%*$1 Billion).

Using the above estimates, we can arrive at Groupon’s business valuation of $6.69 billion (288*23.23). This business valuation is again in the ball park of the rumored deal price! At first sight, it looks like Google is overpaying for Groupon. But it may not be overpaying. It may be a steal!

So are the business valuation concepts you learn in class used in business valuations in the real world? Looks like a resounding YES! So make sure you get your MBA finance concepts clear. You may be called to use it in the near future!

Go ahead and try the same with EBAY or AAPL’s valuation multiples. Let us know what you would pay for Groupon business using valuation multiples.

Google’s recent bid to buy Groupon’s business offers interesting lessons in valuation. Rather than rewrite the story, I want to point you to a finance tutor‘s article on business valuation.

Finance Tutor addresses the article from the perspective of testing the valuation concepts you learn in business school. With their permission, I repost finance Tutor’s article here.

Part 1

You learn the about business valuation in business school. But are the business valuation concepts you learn in business school used in business valuations in the real world?  Lets check a current business valuation:

You must have heard about Google’s interest in buying Groupon’s business at a reported valuation of $5-6 Billion! How could Google arrive at this business valuation of Groupon’s business? Valuation principles direct us to use either the discounted cash flow method orvaluation multiples method to arrive at business valuations.

Business Valuations using the Discounted Cash-flow Method

To arrive at business valuation using the Discounted Cash-flow (DCF) process, we need to project out the cash flow of the business into the foreseeable future.  We discount this cash flow at the appropriate discount rate to arrive at the present value of cash flows for this valuation period. We then estimate a terminal value (present value of the cash flow beyond the foreseeable future assuming cash flow grows at a constant rate usually inflation rate or slightly higher).  The sum of the present value of cash flows for the foreseeable valuation period and the terminal value form the basis of the business valuation using the DCF method.

Can we estimate Groupon’s business value using the DCF method? We will need detailed projections of Groupon’s future cash flow which we do not have! We can try arrive at the business valuation with some estimates. But why do this when we have an easier approach?

Business Valuations using the Multiples

Business valuations using the valuation multiples is essentially looking at the business valuation similar companies have obtained recently and relating that to known business metrics like sales, earnings per share, customers,  etc. Groupon does not have any comparable companies with publicly available data. We therefore need to look at companies with similar business characteristics, growth rates, profit margins, etc to arrive at the appropriate valuation multiples.

Part 2 of this post shows you how valuation multiples can be used to arrive at the business valuation of Groupon.

How can I figure out the number of weekdays between two days in a year?

Have we learnt our lessons from the economic crisis? Or do we still need more financial risk tutoring? What can MBA programs do to promote an understanding of financial risk in MBA students who will lead in the future ?

The economic crisis over the last two years has seen plenty of paper, ink and blog space being used to point fingers at almost everyone! Governments, political parties, organizations ( both private and public), individuals, leaders, society, habits, et al have been accused of contributing to the crisis. Economist.com has an interesting take on financial risk. In a special report on financial risk Matthew Valencia talk about various views. Read it in detail.

Much has been written and talked about. Have we learnt our lessons? Or do we still need more financial risk tutoring? I believe we still need more financial risk tutoring. Creative financial accounting, fancy economic models and financial modeling, etc are not the solution. Business schools must make financial risk management an integral part of their MBA programs.

The MBA program is a challenge for most of us! Juggling work, studies, family duties, extra curricular activities and other demands on your time is never easy. If you are from a non- business background you can add to that list subjects like accounting, finance, statistics and operations research which require great tutors and sufficient time to master. We hear this often and want to highlight this great quote from Roosevelt.

It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.

- Teddy Roosevelt, April 23rd 1910

Hang on and persevere. This MBA program will be over soon and you will enjoy the benefits of being an MBA graduate! In the meantime, if our MBA tutors including accounting tutors, finance tutors, statistics tutors, economic tutors, operations management tutors, etc can assist you in any way, please do not hesitate to get in touch with us. Private tutoring does make learning a lot easier and faster.

We truly believe that MBA programs (good ones) are worth every dollar you spend on them and are easily one of the best masters’ programs out there (for most people).  One of the reasons is that an MBA program is very versatile.  If you list out all the sectors or functions that students join after their MBA, you will  probably list out everything under the sun.  An MBA adds value in almost all industries, sectors and roles.

Here is additional evidence why we believe that an MBA is a versatile program. An Economist article on the economics of cows mentions  that Dr Galligan, got an MBA from the University of Pennsylvania after originally studying veterinary sciences. He is now teaching veterinary economics. He has also spent time helping Amish farmers in the past! How much more interesting can life get!?

Here is the kicker! Whichever industry or function you are in one of our MBA tutors can tutor you on a subject that is of interest to you!  The range of concepts we tutor students in is so wide that between our pool of MBA tutors (finance tutors, economics tutors, statistics tutors, accounting tutors and financial modeling tutor) we will have something that is of interest to you! It may be understanding the economics of a cow, calculating the net present value of an asset, figuring out the return on investment of a new project, building a business plan or a financial model for a business plan, or figuring out the marketing strategy for a new market but one of our MBA tutors can help you learn something interesting. Challenge us on this. Give us a call.

Today’s WSJ has an article on a trend in business schools these days. With jobs few, business grads are turning into entrepreneurship.

This is in our opinion, a good trend. Entrepreneurship will teach them a number of things that a regular job will not – and quickly. Business plans, cash-flow management, customer service, value to a customer, competition, recruiting, etc become not just terms or concepts these business school grads are familiar with but real issues to deal with directly! It also helps boost the economy as they generate net jobs and value to investors.

A quick bit of advice. Make sure you have a good business plan – We leave it up to you to decide if you want to write it out or just think it through. Here is a quick article on why it is very important to have a business plan.

The MBA tutors at GraduateTutor.com salute this trend and have been helping aspiring entrepreneurs with business plans in a variety of ways. If you are looking at developing a business plan, our MBA tutors can help you in a number of ways be it collaborating with you to write the entire business plan, reviewing your business plan to suggest areas to improve it, providing you research support to find critical data points or building a financial model for your business plan. Read more about our business plan services here. Our MBA tutors have helped a number of our customers who have included business school graduates who just want a second opinion or those who are unfamiliar with business and need a lot of help. We can also draw upon specialists from our pool of finance tutors, accounting tutors, economic tutors and other research specialists depending on your need. We are happy to assist and welcome more entrepreneurs into this world.

What do entrepreneurs need to understand about finance!?  Why do they need finance tutoring!?

Often people think starting a business is simple.  It is simple in many ways but as you get further into the business, there are important decisions to be made that will impact the long term sustainability, profitability and returns of the business / owners / investors.  Here is a sample of terms you need to know when structuring investments:

• Pay to Play
• Anti-Dilution
• Liquidation Preference
• Protective Provisions
• Information Rights
• Registration Rights
• Redemption Right
• Conversion
• Right of First Refusal
• Restriction on Sales
• Voting Rights
• Vesting
• Employee Pool
• Proprietary Information and Inventions Agreement
• Indemnification
• Initial Public Offering Shares Purchase
• Precedent Conditions to Financing
• Drag

Be smart.  Work with our finance tutor or our accounting tutor to get the basics right.  Small decisions could make a large impact!

Graduatetutor.com assists b-school students with tutoring in a variety of subjects.  We are now thrilled to formally launch our business plan tutoring services.

There has been a spurt of new entrepreneurs and we want to do our bit to support them.   See this special report on entrepreneurship in The latest edition of The Economist.  According to this NYT article, more people are now forced to start a business.  It may be that people are tired of looking for work like the title of this article says or it may be that you have less to lose once you are laid off!  Whatever your reason for starting a business is, it always helps to plan well before you do so.
Starting your business is a risky venture.  Statistics show that only one in ten or more businesses succeed.  What can you do to increase your odds of success?

Answer:  Write a business plan before you start a business.

We believe putting down your ideas in a business plan before you start really helps in many ways.  See our business plan tutoring page to read more on how a business plan can help before you start a business and how GraduateTutor.com can assist you.
People get ideas all the time  but unfortunately ideas alone will not create a successful start up.  The idea needs to be implemented.  But even  implementation is not sufficient to create a successful business.  The idea must be implemented in a manner that it must produce more revenues /cash flow than it costs to bring the product or service to the market.

Writing a business plan before you start a business will help you evaluate if your business idea can produce more revenues /cash flow than it costs to bring the product or service to the market.  If the answer is a resounding yes, then it is a wise decision to move forward.  If not, pause and think of a new idea.
We believe that if more people had written business plans before they started their businesses, the statistic that  nine out of ten startups fail would have been so much better!  So take our advice and write a business plan before you start a business!

(full disclosure:  We offer business plan tutoring services! Please don’t feel obligated to work with us.  Just write a business plan before you start a business.)

Senith Mathews is the founder of GraduateTutor.com.  Having seen many MBA classmates struggle with their quantitative subjects and having tutored some of them, Senith saw first-hand the need for high quality tutoring services.  About two years ago, he felt technology developments had made it feasible to provide tutoring services online and so began Graduatetutor.com to provide high quality MBA tutoring services.  He was pleasantly surprised to see that GraduateTutor.com’s services are being availed of by not just MBA students but also by working professionals, other graduate students and universities.  Senith is currently very active in tutor recruitment and student services as he feels that these two functions are the most critical aspect of the GraduateTutor.com experience.  He also oversees the marketing and operations team at GraduateTutor.com.

Prior to founding GraduateTutor.com, Senith worked as a management consultant at Mercer Management Consulting (now Oliver Wyman) out of their Dallas office, consulting on strategy, operational, private equity, M&A and valuation projects.  Senith has over 10 years of professional management experience including leading a non profit performing arts organization and advising multinationals investing in India as part of Arthur Andersen’s Tax and Business advisory division in India.

Senith Mathews is a qualified Chartered Accountant (~CPA) and has a MBA from the Cox School of Business at SMU in Dallas, TX.