{"id":21767,"date":"2020-01-08T18:51:49","date_gmt":"2020-01-08T23:51:49","guid":{"rendered":"https:\/\/breakingintowallstreet.com\/biws\/?post_type=biws_kb&#038;p=21767"},"modified":"2024-08-14T06:23:17","modified_gmt":"2024-08-14T11:23:17","slug":"ipo-valuation-model","status":"publish","type":"biws_kb","link":"https:\/\/breakingintowallstreet.com\/kb\/debt-equity\/ipo-valuation-model\/","title":{"rendered":"IPO Valuation Model (25:44)"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_81 counter-flat ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">IPO Valuation Model<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/breakingintowallstreet.com\/kb\/debt-equity\/ipo-valuation-model\/#Step_1_Assumptions_Setup\">Step 1: Assumptions &amp; Setup<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/breakingintowallstreet.com\/kb\/debt-equity\/ipo-valuation-model\/#Step_2_Trading_vs_Pricing_and_the_Pricing_Discount\">Step 2: Trading vs. Pricing and the Pricing Discount<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/breakingintowallstreet.com\/kb\/debt-equity\/ipo-valuation-model\/#Step_3_Determining_the_Primary_vs_Secondary_Shares_and_the_%E2%80%9CGreenshoe%E2%80%9D_Overallotment_Provision\">Step 3: Determining the Primary vs. Secondary Shares and the &#8220;Greenshoe&#8221; (Overallotment) Provision<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/breakingintowallstreet.com\/kb\/debt-equity\/ipo-valuation-model\/#Step_4_Net_Proceeds_to_Issuer\">Step 4: Net Proceeds to Issuer<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/breakingintowallstreet.com\/kb\/debt-equity\/ipo-valuation-model\/#Step_5_Valuation_Multiples\">Step 5: Valuation Multiples<\/a><\/li><\/ul><\/nav><\/div>\n\n<style>.enteremail__large--inline{margin:60px auto!important}<\/style>\n<p>We get a lot of questions about &#8220;IPO valuation&#8221; or &#8220;IPO modeling,&#8221; but the truth is that it\u2019s really simple because you don&#8217;t, in fact, &#8220;value&#8221; a company in an IPO.<\/p>\n<p>Instead, you simply value a company and then decide how its valuation might be different in an IPO (e.g., no private company discount).<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Step_1_Assumptions_Setup\"><\/span>Step 1: Assumptions &amp; Setup<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>You almost always start an IPO model with an idea of how much in funding the company wants to raise, and the multiples it may be valued at (based on public comps).<\/p>\n<p>The multiples used vary by industry, but 1-year forward P \/ E multiples are very common (e.g., go to the next full fiscal year and assume a multiple for that projected full-year figure).<\/p>\n<div class='code-block code-block-2' style='margin: 8px 0; clear: both;'>\n<div class=\"kb-adinsert-modal\">\n    <div class=\"kb-adinsert-top\">\n      <div class=\"media\">\n          <img decoding=\"async\" class=\"alignnone size-full wp-image-28448\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/24164120\/adv-fm-tile.png\" alt=\"PowerPoint Pro\" width=\"128\" height=\"128\" \/>\n      <\/div>\n      <div class=\"content\">\n          <h3>Master Financial Modeling for Investment Banking With <strong>BIWS Core Financial Modeling<\/strong><\/h3>\n      <\/div>\n    <\/div>\n    \n    <div class=\"full_text\">\n    \t<ul>\n        \t<li>\n            \t<h4>Become a financial modeling pro<\/h4>\n              <p>158 videos, detailed written guides, Excel files, quizzes, and more<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Complete 10+ detailed global case studies<\/h4>\n            <p>These include both the theory and the practical applications<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Prepare for your internship or full-time job<\/h4>\n            <p>Gain the skills you need to \u201chit the ground running\u201d on Day 1\n\n<\/p>\n\t\t\t  <\/li>\n      <\/ul>\n        \n      <a class=\"cta-link orange-button-medium\" href=\"https:\/\/breakingintowallstreet.com\/core-financial-modeling\/\" target=\"_blank\">Full Details<\/a>\n      \n      <a class=\"cta-link orange-button-medium bg-blue\" href=\"https:\/\/biws-support.s3.us-east-1.amazonaws.com\/Course-Outlines\/Core-Financial-Modeling-Course-Outline.pdf\" target=\"_blank\" rel=\"noopener\">Short Outline<\/a>\n    <\/div>\n<\/div><\/div>\n\n<p>Here, we\u2019d pick forward multiples from similar, profitable social networking \/ mobile messaging companies (not covered in this tutorial in the interest of time).<\/p>\n<p>Amount of Capital to Raise: Very discretionary and it comes down to the company&#8217;s plans, how many existing shareholders want to sell, whether it&#8217;s PE or VC-backed, etc.<\/p>\n<p>This is often set to 20-40% of a company&#8217;s value; common to sell ~1\/4 or ~1\/3 of the company in a public offering, though that also varies.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Step_2_Trading_vs_Pricing_and_the_Pricing_Discount\"><\/span>Step 2: Trading vs. Pricing and the Pricing Discount<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>You apply the assumed multiple to the company&#8217;s relevant metric, so Forward Net Income in this case, which gets you the &#8220;Post-Money Equity Value @ Trading.&#8221;<\/p>\n<p>This is what the company&#8217;s market cap should be after it has raised the capital and is trading on the stock market.<\/p>\n<p>So we can then calculate the Post-Money Equity Value at Trading (the market rate) vs. Pricing (the discounted rate that institutional investors get).<\/p>\n<p>And then calculate the Implied Offering Price per Share based on this &#8211; take this value, subtract the funds raised, and divide by the company&#8217;s current share count.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Step_3_Determining_the_Primary_vs_Secondary_Shares_and_the_%E2%80%9CGreenshoe%E2%80%9D_Overallotment_Provision\"><\/span>Step 3: Determining the Primary vs. Secondary Shares and the &#8220;Greenshoe&#8221; (Overallotment) Provision<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>&#8220;Primary Shares&#8221; are newly created shares that represent actual capital being raised in the deal &#8211; this capital then goes to the company in the form of cash.<\/p>\n<p>&#8220;Secondary Shares&#8221; represent existing investors selling their stakes to new investors (usually large institutions like Fidelity). No capital is raised here.<\/p>\n<p>Formulas: Always determine the Primary Shares first, based on the Post-Money Equity Value @ Pricing and\/or the amount of capital raised\u2026 and then figure out the Secondary Shares in relation to that.<\/p>\n<p>Have to also figure out split between &#8220;Base Offering&#8221; and &#8220;Greenshoe&#8221; &#8211; &#8220;Greenshoe&#8221; is an option to issue even more shares if demand is strong enough. Used for cases where the company wants to keep the same offering price, but simply raise more capital if more investors are interested.<\/p>\n<p>Very commonly set to ~15% in offerings in developed markets.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Step_4_Net_Proceeds_to_Issuer\"><\/span>Step 4: Net Proceeds to Issuer<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Look at Total Offering Size first (Primary + Secondary + Overallotment) and then subtract out fees.<\/p>\n<p>Underwriting Discount: Banks used to, and sometimes still do, buy a portion of the company&#8217;s stock as &#8220;insurance&#8221; in case the company can&#8217;t sell it to anyone else\u2026 so this is supposed to compensate them for the risk of holding the stock temporarily, in case it can&#8217;t find any buyers.<\/p>\n<p>Bigger deal = lower fee % in most cases.<\/p>\n<p>% Company Sold: Based on Primary Proceeds and Post-Money Equity Value @ Pricing &#8211; how much the company sold of itself just before it started trading publicly.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Step_5_Valuation_Multiples\"><\/span>Step 5: Valuation Multiples<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>We move from Equity Value to Enterprise Value as we normally do\u2026 but we must factor in the cash raised in the IPO now!<br \/>\nEquity Value implicitly reflects this cash, so it must be subtracted when calculating the new Enterprise Value.<\/p>\n<p>Would have to compare these multiples to those of the public comps to decide whether or not they look reasonable.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>In this tutorial, you\u2019ll learn what an \u201cIPO valuation\u201d really means, how to model an initial public offering (IPO) transaction, and what an IPO model tells you about the company and its possible valuation multiples before and after going public.<\/p>\n","protected":false},"featured_media":21907,"template":"","class_list":["post-21767","biws_kb","type-biws_kb","status-publish","has-post-thumbnail","hentry","kb_category-debt-equity"],"acf":[],"_links":{"self":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb\/21767","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb"}],"about":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/types\/biws_kb"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/media\/21907"}],"wp:attachment":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/media?parent=21767"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}