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Print outs - 2. Entrepreneurs users of PE1.pdf
Print_outs_-_2._Entrepreneurs___users_of_PE1.pdf
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Print_outs_-_2._Entrepreneurs___users_of_PE1.pdf-Summary: Entrepreneurs / Users of Private
Print outs - 2. Entrepreneurs use...
Print_outs_-_2._Entrepreneurs___users_of_PE1.pdf-Summary: Entrepreneurs / Users of Private
Page 11
Control
Premiums
/ Minority
Discounts:
r
Common
to apply
premium
(30%+¡
for stock
purchases
that
confer
control.
r
Common to
apply
discount
(20o/o)
for
purchases
of
minority
stakes
of
private
cos.
r
Do
not
apply mechanically:
-
Control
premium
should
reflect
rise
in
expected
cash
flows
(and
private
benefits)
from
control.
,
lf
these are
small,
then
no
control
premium.
-
Minority
discount
should
reflect
possibility
that
majority
shareholder
can expropriate
/
reduce cash
flows
to
minority
>
lf
unlikely
or
not
possible,
then
no
minority discount.
EnlÉprcncuial FiMrc€
ild
Pdv¿te
Equity
2l
Stewn
N
Kaplan
Marketability
/
Liquidity
Discounts
:
r
Common
view
that
private
equity
less
valuable
than
public
equity due
to illiquidity.
Sometimes
up
to
30%.
-
Again,
cannot apply
mechanically.
-
May
or
may
not exist.
r
Should
you
sell
for
a
lower value?
-
Makes
no
sense
if
buyer
is
a
public
company / diversified
fund
/
sale
is competitive.
u
No
evidence
public
buyers
of
private
cos. earn
excess
returns.
¡
Should
you pay
lower
value?
Of
course,
lf
you
can.
".
Good
way
for
buyer
to
make
easy
money.
u
Buy
five companies
at
discount,
put
together,
go
public.
-
Justified only
if
there
is
a
good
chance that
you
cannot
get
money
out
when
you
need
the
money.
,
Requires
inability
to
use
stock as collateral.
Enhp@reùial FiMrce
ild
PñvaleE{uity
22
Stown
N
Kaplan
Page 12
Securing
resources
r
Minimize
the
need
for
outside resources.
*
Favor
businesses
that
generate
cash
up front
versus
those
that use
it:
>
Subscription.
>
Facilities
Management.
-
Most entrepreneurs
initially
bootstrap
ventures:
>
Own
resources,
family, friends.
r
When
you
do
need
outside resources
/
investors,
work
hard
to
mitigate
information
problems.
EnlrepEreuriâl
Fimre
ud
Private
Equity
23
Sleren
N
Kenlen
Financing
Do's
(i.e.,
how to mitigate
information
problems):
r
Know business
as
well
as
practicable
before
looking for
$$
(esp.
sophisticated
investors).
r
Do
as
much
as
you
can to
convince investors
(and
yourself)
that
business
will
succeed:
...
Establish
a
demand for
company's
services.
First
customer.
-
Create
team w
/
skills that
address
key success
factors.
-
Make
sure
OUTSIDE-IMPACTS
analysis
is
favorable
and
convey
it
in
plan.
r
Consider investment
from
family
and friends.
-
Gives time to
get
up and running.
...
Outsider more
likely
to
invest if knows
that
you
have
put
loved
ones
on
the
line.
>
lf
business
crashes, so do
your
loved ones.
Enlrepreneuriål
FiMrc€
ed
Privaþ
qiliry
24
Steven
N, Kaplan
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