Private Company Valuation

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The process of which private companies are valuated either through out-right purchase , merger or Acquisition .

The process of valuing private companies is not different from the process of valuing public companies. You estimate cash flows, attach a discount rate based upon the riskiness of the cash flows and compute a present value.

 Valuation is often a blend of cash flow and the time value of money. A business’s worth is in part a function of the profits and cash flow it can generate. Private company valuation is the set of processes used to evaluate a company’s net worth of that year.


Methods of Valuating a Private Companies

Discounted Cash Flow (DCF)

Discounted cash flow (DCF) is a valuation method used to estimate the appearance of an investment opportunity, That is, firm value is present value of cash flows a firm generates in the future. In order to understand the meaning of present value, we are going to discuss time value of money, first .DCF analysis by using future free cash flow projections and discounts them, using a required annual rate, to arrive at present value estimates.

How to do Discounted Cash Flow (DCF) Analysis

The discounted cash flow method is used by professional investors and analysts at investment banks to determine how much to pay for a business, whether it’s for shares of stock or for buying a whole company.

And it’s also used by financial analysts and project managers in major companies to determine whether a given project will be a good investment, like for a new product launch or a new manufacturing facility.

It’s applicable to any scenario where you are considering paying money now in expectation of receiving more money in the future.

Put simply, discounted cash flow analysis rests on the principle that an investment now is worth an amount equal to the sum of all the future cash flows it will produce, with each of those cash flows being discounted to their present value.

Let’s break that down.

  • DCF is the sum of all future discounted cash flows that the investment is expected to produce.  This is the fair value that we’re solving for.
  • CF is the total cash flow for a given year. CF1 is for the first year, CF2 is for the second year, and so on.
  • r is the discount rate in decimal form. The discount rate is basically the target rate of return that you want on the investment.



Replacement Cost Method

A replacement cost is the cost to replace an asset of a company at the same or equal value, where the asset to be replaced could be a building, investment securities, accounts receivable . The replacement cost can change, depending on changes in market value of the asset and any other costs required to prepare the asset for use. Accountants use depreciation to expense the cost of the asset over its useful life.

Replacement value method takes into account ‘the amount required to replace the existing company’ as the valuation of a company. In other words, if one is to create a similar company in the same industry; all costs required to do so will form part of the value of the firm.

Replacing an asset can be an expensive decision, and companies analyze the net present value (NPV) of the future cash inflows and outflows to make purchasing decisions.


Comparative Ratios Method

Ratio analysis is used to evaluate various aspects of a company’s operating and financial performance such as its efficiency, liquidity, profitability and solvency.

One way to analyze your financial health and identify how it might be improved is by looking closely at your financial ratios. Ratios are used to make comparisons between different aspects of a company’s performance or how the company stacks up within a particular industry or region.




Types of comparative Ratios

Liquidity Ratios Liquidity is term used to describe the extent to which a business can meet its short  term obligations as at when due. Insolvency is a state of being unable to pay debt as they fall due. This situation could lead to bankruptcy and collapse of a firm.


Profitability Ratios Profit is the difference between revenues and expenses over a period of time (usually one year). Profitability ratios are used to measure the operating efficiency of a firm. All stakeholders of a firm are interested in the profitability of the enterprises profitability is measured by the following ratios

Leverage Ratios Leverage ratios measure the relationship between the funds provided by the owners (shareholders) of a firm and funds provided by the creditors of the firm. They also measure the ability of the firm to service the charges accruing from the use of outsiders’ funds (creditors).Leverage is measured through the following ratios.


The Means through which private companies are valuated

Asset Purchase

In an asset purchase, the buyer acquires only identified assets and liabilities of a company, not the company itself. With successful negotiation, the buyer can select which of the seller’s assets to acquire (such as inventory, equipment, contract rights and intellectual property) and which not to acquire (such as contaminated real estate or obsolete inventory).Within limits, the buyer can also negotiate which outstanding or contingent liabilities to assume and not to assume. Buyers should nevertheless be aware of successor liability doctrines in various jurisdictions, which are exceptions to the general rule that the seller retains all liabilities that the buyer does not specifically assume.

For tax and liability reasons, it is often said that buyers prefer to buy assets and sellers prefer to sell stock. With an asset acquisition, the buyer can step up the tax basis of the acquired assets to fair value and then depreciate the assets using the higher basis.

Acquisition & Stock Purchase

Acquisition An acquisition occurs when one company acquires sufficient shares in another company so as to give it control of that other company. This may be by a take-over bid or by purchasing shares in the market. Usually, the acquired company is a smaller company and becomes a subsidiary of the acquiring company. A merger may be achieved by an acquisition. But in the ordinary case, the shareholders of the acquired company are paid off (resulting in disinvestments) and the acquirer becomes owner of all or a substantial part of the assets of the acquired company.

In a stock purchase, the purchaser buys the outstanding stock of a corporation directly from the corporation’s stockholders. The target corporation need not be a party to the transaction and may remain unchanged after the closing (other than having different ownership), retaining all of its assets and liabilities. Stock purchases are typically preferred by sellers, because all liabilities are transferred along with ownership of the company, there is no double taxation and there is no need for selling stockholders to liquidate the company after the transaction. This type of purchase could also take the form of the acquisition of all of the membership interests of an LLC, although as noted above the acquisition of an LLC is more commonly structured as an asset acquisition, because there is no particular tax disadvantage to the seller’s members.


Section 590 of the CAMA (repealed) defined “Merger” as “any amalgamation of the undertakings or any part of the undertakings or interests of two or more companies or the undertakings or part of the undertakings of one or more companies and one or more bodies corporate.”

In a merger, one corporation merges with another to become a single ongoing corporation. One company is designated the “surviving,” and the other the “disappearing,” corporation. By operation of law, the surviving corporation acquires all of the assets and succeeds to all of the liabilities of the disappearing corporation, and the disappearing corporation ceases to exist as a separate legal entity. In a merger, the stockholders of the acquired corporation typically receive cash, stock of the surviving corporation or some combination of stock and cash.

Legal Framework

Mergers, Acquisitions and Takeovers in Nigeria are governed by the Investments and Securities Act (“ISA”), the Securities and Exchange Rules and Regulations (“SERR”) made pursuant to ISA, and the Companies and Allied Matters Act (CAMA).

The Securities and Exchange Commission (“the Commission“) is the body in charge of implementing the provisions of ISA and sanctions Mergers, Acquisition and Takeovers in Nigeria.





Different Categories of a Merger

  1. Small Merger
    The lower threshold for a small merger is below 1 million naira of either combined assets or turnover of the merging companies.
  2. Intermediate Merger
    The intermediate threshold is between 1 million naira and 5 million naira of either combined assets or turnover of the merging companies.
  3. Large Merger
    The upper threshold for a large merger is above 5 million naira of either combined assets or turnover of the merging companies



Procedure for Intermediate and Large Merger

For companies with assets between the threshold of 1 million naira to 5 million naira and above the threshold of 5 million naira the following steps are taken for a successful Merger;

  1. The Board of Directors of the two Companies and the Companies will pass separate Resolution for Merger.
  2. Both companies will make an application to SEC as pre-merger Notice attached with;
    1. Complete merger Notification Form
    2. A letter of intent signed by the merging companies
    3. Board resolutions of the merging companies supporting the merger.
    4. A copy of the letter appointing the financial adviser
    5. Letter of no objection from the companies regulators (e. g CAC, Central Bank of Nigeria (“CBN”) etc).
    6. The audited account of the companies for the last 5 years.
    7. A copy of the Memorandum and Article of Association of the merging entities.
    8. A detailed information memorandum of the proposed transaction including all the background studies relating to the merger, and justification for it.
  3. Forward a copy of the Merger notification to any registered trade union that represents a substantial number of its employees, or the employees concerned or representatives of the employees concerned, if there are no such registered trade unions.
  4. After the evaluation of the pre-merger notice with the documents attached, the Commission will grant an approval in principle to the merger after adequate consideration and direct the merging companies to make an application to the court to order separate meetings of shareholders of the merging companies in order to get their concurrence to the proposed Merger.
  5. Make an application to court to order separate meetings of shareholders of the merging companies.
  6. A majority representing not less than three quarters in value of the shares of members being present and voting either in person or by proxy at each of the separate meetings should pass a resolution agreeing to the scheme.
  7. File with the Commission a formal application for approval of the Merger attached with the following documents;
    1. Extract of the minutes of the court ordered meeting of the merging companies in support of the merger duly certified by the director and company secretary.
    2. 2 copies of the scheme document duly signed by the parties to the merger.
    3. Evidence of the executed resolutions passed at the separate court ordered meetings.
    4. Scrutineers report showing the result of voting and total number of votes cast.
  8. After formal approval by the Commission, make an application to court for an order sanctioning the scheme.
  9. Comply with post approval requirements.

3 months after the approval by the Commission, a post-merger inspection shall be carried out by the Commission to ascertain the level of compliance with the provisions of the scheme documents.

Small Merger

A party to a small Merger is not required to notify the Commission of that merger unless the Commission requires it to do so and may implement the Merger without approval unless required to notify the Commission. However a party to a small Merger may voluntarily notify the Commission of the merger at any time. A party to a small Merger required to notify the Commission shall take all the steps enumerated above for Intermediate and Large Mergers.

If the Merger is approved by the Commission, the parties shall apply to the court for the Merger to be sanctioned and when so sanctioned, the same shall become binding on the companies.


For a Takeover to be sanctioned, a minimum of 30% of the shares of the target company must be bided for.

Procedure for Takeover

  1. The offeror (acquiring) company passes a Resolution to bid for the shares in another company.
  2. The offeror company makes an application to the Commission for an authority to proceed with the Takeover bid. The authority if obtained lasts for 3 months subject to renewal. The application would be attached with the following documents:
    1. The Takeover bid;
    2. Two copies of the information memorandum (where applicable);
    3. A letter of “no objection” from relevant regulatory body ( where applicable);
    4. A copy shareholders and board resolutions of the offeror certified by the company secretary approving the takeover;
    5. A copy of the certificate of incorporation certified by the company secretary;
    6. Copies of the memorandum and article of association of the offeror certified by the Corporate Affairs Commission;
    7. Copies of letters from the offeror appointing their financial adviser to the transaction.
  3. Upon receipt of authority to proceed with a Takeover bid, the bid proposal would be lodged with the Commission for registration and would be registered by the Commission if it is satisfied that it complies with the provisions of the Act.
  4. The following documents shall be filed with the Commission;
    1. 2 draft copies of the Takeover bid;
    2. Consent letters of directors and other parties to the transaction;
    3. CAC Form containing particulars of directors of the offeror;
    4. A copy of draft Financial Services Agreement between the financial adviser and the offeror, and any other agreement(s) entered into in the course of the transaction;
    5. Annual report and accounts of the offeror for the preceding period of five (5) years the company has been in existence;
    6. A draft newspaper publication of the proposed Takeover;
    7. Any other document the Commission may require from time to time.
  5. After successful registration, the Takeover bid shall be dispatched by the offeror concurrently to each director of the offeree (target) company; each shareholder of the offeree company and the Commission.
  6. The target company calls a meeting to consider the bid and not less than 90% of the shares subject to acquisition must be accepted.
  7. The offering company is to give notice to the dissenting shareholders within 1 month of the acceptance of the bid to elect either to be paid like consenting shareholders or require their shares to be valued.
  8. The dissenting shareholders are to communicate their acceptance or otherwise within 20 days, if not they would be deemed to have accepted to be paid like others who accepted the bid.
  9. The offering company must pay the amount due for the shares of the dissenting shareholders to the target company as a trustee.

The offering shall file with the Commission, within 7 working days of the conclusion of the offer, a schedule of target company shareholders who accepted the offer containing the volume and value of the respective shares and evidence of settlement of consideration

Mergers and Acquisitions occur when a viable company takes over another company or two companies decide to merge to form a new company or to maintain the earlier names of one of the company.

Merger is defined by ISA as any amalgamation of the undertakings or any part of the undertakings or interest of two or more companies and one or more corporate bodies while Acquisition means the takeover by one company of sufficient shares in another company to give the acquiring company control over that other company.

Further information can be obtained here