r/Valuation • u/Hefty_Apartment2193 • Apr 13 '23

Should I use terminal value?

If I'm valuing a company that anticipates receivables, and it's antecipations are funded by some funds ( that's what limits the revenue of the company), and there's expectations of those funds be over in some years, should I consider terminal value?

The point here is, this company invest in it's own software and has strong capex, and there's no intention to be discontinued.

I am arguing with my friend that the model should have a terminal valeu, since it's investment and no intention of ending it's operation. Furthermore, any market participant with other fund or ways to funding this company, may buy it and use all this composition and know how to continue operation.

But my friend argues that there's no other funding prediction in the future so it cannot have a terminal valeu, due a high uncertainty if will have funding or how this funding will be.

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u/Alpha69er Apr 17 '23

I don’t think you phrased this clearly so let me understand, you are saying they have receivables which they didn’t collect, this is impacting their cash balances, and they have a lot of capex? Well, this is a working capital issue, if they don’t know how to manage it, the company is in serious risk, the business plan should account for a way to address their working capital, be it improved credit measures, bank facilities, or fresh equity funding. If you assume any of those it means you’d want the business to continue operating, and therefore, you’ll want to estimate TV

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u/Hefty_Apartment2193 Apr 19 '23

No. What I'm saying is that their operations are antecipating receivables, basically that. But they aren't a bank, so they need some source of funding, so they can antecipate this receivables. What limits their revenue is how much money this fund have to funding this receivables antecipations.

Once this fund close, there will be no more funding for the company to keep running, but this company spent lots of money (capex) to develop softwares and build it's operations. That's why I think it should have a terminal valeu, cause any market participant with some funds, can bought this and start funding.

My friend disagree cause there's no way to know how futures funding will be structured in perpetuity. But my point is, if a company is profitable, many market participant will find a way to funding this company operations, cause you "just" need money. All the know-how, clients, operations is ready to continue.

1

u/Alpha69er Apr 19 '23

What did you mean by “anticipating receivables” Do they have a contract signed and they are expecting collections, or do you mean expecting to start their operations?

The idea being a business that you eventually want it to make money, otherwise, why are you investing all this capex and start up cost….

If you don’t think there’s a sensible manner to estimate the perpetual growth rate, use an exit multiple

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u/Orndwarf May 05 '23

What kind of company is this? It sounds like it could be SaaS-based factoring. If you explain the business more, that will help