Let's start the last part of our course,

which is devoted to company valuation and deal making.

Company valuation is really the core of any kind of deal of PE.

The definition of company valuation is relatively easy because company valuation

just simply means to calculate what is the value of the equity of a company.

As you can imagine, within PE deals,

it's a very relevant concept because PE means to finance a company,

and the PEI receives that equity.

And to calculate what is the value of the equity is fundamental

to transform the amount of money

that PEI gives to the company in a certain amount of equity.

It's a quite sensitive issue because the amount of equity affects

the capability of the PEI to interact

within the corporate governance of the venture backed company.

Now the problem is to understand how it's possible to calculate the equity value.

Within private equity, we do not need a new theory.

Within corporate finance, there is a very solid theory.

Very solid best practices are driving whatever kind of practitioners and

people belonging to academia to calculate the equity value.

So we do not need a new theory.

What is very relevant is to understand in which way

within private equity deals the concept of equity value is applied.

What is relevant to understand is that, within private equity deals,

the issue equity value is related to two different moments.

The first moment is at time 0, when the PEI decides to invest.

And at time 0 you have a problem of calculating the equity value because you

have to decide what is the amount of equity the private equity investor is

going to buy.

But we have also a second moment, where calculating the equity value is fundamental,

and the second moment is in the moment of the exit.

So the same concept, the two times in which it's fundamental to calculate

the equity value, in the moment of the investment and in the moment of the exit.

What is very relevant to remember is that the two moments are related together,

because both the difference of the equity value at time 0 and the time of exit,

and the time in which the private equity decides to stay in the company

affect the IRR of the entire investment.

This concept is so important that in many deals,

in many transactions, the activity of the PEI

is to negotiate, very hard, the price of the entrance.

That means to minimize what is the value of the equity of the company.

And on the other hand, the effort of the PEI is in negotiating, in a very

tough way, what is the level of the equity value at the exit,

in this case, not to minimize but to maximize.

And now what you have to do is to remember the fundamentals, the pillars

of the concept of equity value, company valuation within corporate finance.

The most popular way to calculate the equity value of a company

is named discounted cash flow, DCF, where the rationale of DCF

means to calculate the value of the company just simply as the present

value of the future cash flows the company is about to generate.

Obviously to know the future cash flows we do not need a crystal ball,

but we need a very solid business plan, because we can take

the future cash flows from the business plan which is given by the company.

If you want to apply the DCF methodology, we have to use a very popular formula.

The formula is based on the following concept.

The equity value of a company is equal to the sum

from T1 to n of the cash flows generated by the company.

From time 1 to time n, divided by 1 plus

WACC to power t plus the terminal value at

time n minus the net financial position

minus the minorities plus the surplus assets.

Typically, when we say from T1 to time n,

it's related to the availability of the business plan, and

the common practice is to use three, four, or a maximum of five years.

So when we say terminal value at time n, it means that at time three,

four or five accordingly with the availability of data.

Within this formula, what is quite relevant to remember is that

the sum, the present value of the cash flows plus

the terminal value at time n is named enterprise value.

It's a quite relevant concept because the enterprise value is not affected

by the profile, the characteristics, of the liability of the company.