Doubt in valuation using DCF

CFA General
#1

I am valuing a startup company with just 1 year of operations having current year revenue say 10 Cr. It is planning to expand through other cities and states and by virtue of setting new offices and M&A, it is expecting to earn a revenue of say 500 Cr in 5 year.

So my question/doubt is can I incorporate it’s future plan of realising 500 Cr revenue in 5 year by means of setting new offices or M&A in its current valuation which is coming around say 100cr while presenting to prospective investors where currently it just has just one office but according to its plan it will have say 30 office(in comming 5 year) across country. Will that valuation be realistic. Or should I just value what this single office can achieve alone which is coming around 25 cr.

Thanks

#2

DCF on a startup would be slightly better than throwing a dart at a dartboard with valuations. Slightly.

#3

This business sounds really odd. What kind of company is in its first year and wants to expand to 30 locations? How does a company have the cash to fuel that much growth? This could be a risky strategy.

#4

DCF valuation is heavily dependent on cash flow projections’ reasonability. It is most appropriate for businesses with stable cash flows/cash flow proxies (such as EBITDA). Garbage in = garbage out, so you should really be careful what inputs you use and challenge management on the reasonability of assumptions and estimates they have made. With start-ups it is much better to employ venture capital valuation techniques.

#5

If it were me, focus your valuation on a per office basis. Provide an input for number of offices assumed and then have it update your model with the new number of offices. I am not sure you familiarity with the modeling process, but the way I would set this up is to show the finances of a single office and then have another page where you set up the schedule of office openings and associated capex with that market. If you have the offices opening set to 10, it simply flows through the whole model updating the whole thing. If you want to show all 30, then you can do it with a single switch.

Your largest criticism will be the source of capital to open these offices so make sure you’re putting the whole 3 statements together and showing the sources and uses.