Journal of Business Valuation and Economic Loss Analysis

Published by De Gruyter

Volume 17 Issue 1

February 2022

Issue of Journal of Business Valuation and Economic Loss Analysis

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Contents
Journal Overview

Publicly Available November 21, 2022

Frontmatter

Page range: i-ii

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Research Articles

February 28, 2022

The Performance of Option Pricing Models Estimating the Marketability Discount in a Pre-IPO Real-World Data Setting: Evidence from Europe

Stefan O. Grbenic

Page range: 1-37

Abstract

Valuation analysts adjust prices of private firm’s stock downward from their fully marketable counterparts, reflecting the private firms’ lower level of marketability. This discount for lack of marketability can be substantial in magnitude. This study examines the performance (according to bias and accuracy employing estimation error methodology) of seven popular option pricing models in generating discount estimates to coincide with empirically observed discount benchmarks (based on the pre-IPO methodology) in European Union member countries over the period 2004 until 2018. The results allow for the general conclusion that some option pricing models are superior in most settings, coinciding with their individual benefits and deficiencies. The detailed analysis indicates that (i) the superiority of these option pricing models holds for a wide range of periods of assumed restricted marketability, (ii) segmenting discount benchmarks according to their size improves the performance of the option pricing models, (iii) segmenting discount benchmarks according to both, the underlying volatility of stock returns and dividend yields, does not improve the performance of the option pricing models, and (iv) IPO underperformance has no material impact on relative option pricing model’s performance.

August 4, 2022

The Proper Treatment of Cash Holdings in DCF Valuation Theory and Practice

James L. Canessa, Gregg A. Jarrell

Page range: 39-64

Abstract

The discounted cash flow (“DCF”) model is widely used for valuing corporate assets. But valuable assets that do not generate cash flows will be missed by the DCF approach. Because cash interest income is generally not included in the projected net cash flows of operating assets, the value of cash is regarded as a non-operating asset whose value must be added to the DCF enterprise value. Unfortunately, it has become standard practice on Wall Street and for the courts to exclude some amount of cash from non-operating assets on the basis that it will be used to finance the immediate operations of the business. The exclusion of so-called “operating” or “working-capital” cash is widely accepted as necessary and is recommended in virtually all valuation texts and treatises. We disagree and show that all cash should generally be added as a non-operating asset, except in unique circumstances where “wasting cash” is not earning a fair market return. We explain that excluding operating cash is correct only if either the interest income on cash is included in the net cash flows projections used to compute DCF value, or if the specific (near-term) operating expenses that will be covered by operating cash are excluded from the net cash flow projections. In either case, the full economic benefits of owning operating cash are fully reflected in the DCF enterprise value of the company, causing the DCF value to be higher by the exact amount of operating cash that is excluded. We call this the symmetry principle of operating cash. In practice, neither condition is normally met, so that all cash should generally be treated as a non-operating asset.

Open Access September 6, 2022

Relative Valuation of Private Held Companies: Valuation Multiples in the Czech Brewing Industry

Michal Drábek

Page range: 65-100

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Abstract

This article focuses on the topic of the relative valuation from the perspective of non-publicly traded companies and the determination of industry multiples allowing the subsequent application of this approach to specific industries. I chose the Czech brewing industry as the target industry, represented by the 50 most important entities (covering more than 99% of the industry’s turnover). Due to the fact that no market value data are available for this type of company, I first used an income valuation approach – the discounted cash flow (DCF) method to assess the market value of each company in the sample. I then quantified valuation multiples of P/E, EV/EBIT, EV/EBITDA, P/S, EV/S, P/BV, and EV/IC for each company, from which I determined industry statistics. I verified their suitability for use in the relative valuation approach and compared them with the results of existing studies on the most commonly used valuation approaches in the Czech Republic. Furthermore, I compared my own calculations of industry multiples for non-publicly traded companies with available data on industry multiples of publicly-traded companies in the brewing industry across Europe. The results of the comparison show that these multiples are on average lower for non-publicly traded companies than for listed companies.

November 9, 2022

Understanding Startup Valuation and its Impact on Startup Ecosystem

Ramesh Menon, Leena James

Page range: 101-114

Abstract

Startups play a substantial role in the economic growth of a nation, by introducing new technologies, ground-breaking innovation, creating jobs, etc. A couple of decades back, it was extremely difficult to start a business, but today new businesses pop up every day, all around the world. Recognizing the importance of a startup, governments across the globe are doing their best to provide an atmosphere where startups can bloom. Despite its importance and all the support, the startup failure rate is at 90%; about 10% of startups fail in the first year and 70% fail in two to five years. The startup boom saw the emergence of alternative sources of funding like Venture Capitalist, Angel Investors, etc. These investors (Venture Capitalist, Angel Investors, etc.) played a crucial role in startup success by providing easy access to funds which is a critical and scarce resource for any founder. Traditionally business success is linked with sustainable profitability but in the startup world most used method to define success is valuation. Based on CB Insights research, as of January 2022, there are more than 900 unicorns (startup with a valuation of over $1 billion) around the world and of these unicorns less than 10% are profitable. It’s difficult to explain/comprehend how startups’ which are neither profitable nor foresee profitability in near future are valued higher than traditional business with stable profitability. Current valuation methods have impacted the startup ecosystem. Today, founders start their business with exit in mind, the focus of founders is on growth/scale rather than profitability. There is a school of thought that believes that such valuations will soon result in the bursting of the startup bubble just like the dotcom bubble seen in late 1990s. The focus of this paper is to investigate the techniques used by investors for startup valuation and how these techniques are impacting the startup ecosystem and its founders. The paper looks at all stages of the investment cycle, from seed to IPO or takeover and understands the process of valuation at each stage and how it impacts all stakeholders in the ecosystem.

About this journal

Objective
The Journal of Business Valuation and Economic Loss Analysis (JBVELA) is a refereed academic journal that publishes continuously throughout the year and is co-edited by Bradley Ewing and James Hoffman. The mission of the Journal of Business Valuation and Economic Loss Analysis is to improve the practice of business valuation, economic loss analysis, and risk management by helping to inform academics, practitioners, and attorneys about theoretical and practical developments in these fields.

Topics

business valuation
economic loss analysis
risk management

Article formats
Research articles
The journal publishes three categories of manuscripts. The first category encompasses both empirically- and conceptually-based manuscripts that advance the fields of business valuation, economic loss analysis, or topics related to risk. The second category of manuscripts focus on the description of how theory has been put into practice, including case study examples. The third category of manuscripts concerns how recent rulings and changes in the law affect business valuation, economic loss analysis, and risk management practices, assessment, and analysis.

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