How do investment banks evaluate a private firm going public? Is it based on the assets owned by the company?
"Will the investment bank evaluate the worth of my company more than or less than 50 crs. Assuming the salvage value of the assets of 50 crs (meaning that's what you could sell them for to someone else), that would be the minimum value of your company (less any outstanding debts). There are many ways to calculate the ""value"" of a company, but the most common one is to look at the future potential for generating cash.   The underwriters will look at what your current cash flow projections are, and what they will be when you invest the proceeds from the public offering back into the company.  That will then be used to determine the total value of the company, and in turn the value of the portion that you are taking public. And what will be the owner’s share in the resulting public company? That's completely up to you.  You're essentially selling a part of the company in order to bring cash in, presumably to invest in assets that will generate more cash in the future.  If you want to keep complete control of the company, then you'll want to sell less than 50% of the company, otherwise you can sell as much or as little as you want." They're not going to look very hard at the asset value (except for actual cash in the bank), which doesn't bear much relationship to the real value of the company. More likely they will look at the last three years' earnings and choose a target P/E ratio based on that. The owner's share depends entirely on how much of the business they choose to sell. If the business is worth $60M and they want to raise $20M for themselves, then that means selling 33% of the company. If they want to raise $20M for the business as well, then that means selling half the company and retaining ownership of the other half, which is now worth $80M because of the cash infusion. But many stock exchanges will have minimum requirements for the percentage of the shares that are trading freely, so they will have to sell at least that much.
How is it possible that a publicly traded investment company's net asset value per share is higher than their share price? Wouldn't you (in theory) be able to buy the company and liquidate it to make a profit of (NAV/share - price/share)*number of shares, ignoring transaction costs and such?   I realize that since part of their portfolio is in private equity, NAV is hard to calculate and hard to liquidate as well, but it doesn't really seem to make sense to me. Would love some input.   The company I'm talking about in this instance is 180 Degree Capital Corp, but this isn't the first time I've seen this. The other answer has some good points, to which I'll add this:  I believe you're only considering a company's Initial Public Offering (IPO), when shares are first offered to the public.  An IPO is the way most companies get a public listing on the stock market. However, companies often go to market again and again to issue/sell more shares, after their IPO.  These secondary offerings don't make as many headlines as an IPO, but they are typical-enough occurrences in markets. When a company goes back to the market to raise additional funds (perhaps to fund expansion), the value of the company's existing shares that are being traded is a good indicator of what they may expect to get for a secondary offering of shares. A company about to raise money desires a higher share price, because that will permit them to issue less shares for the amount of money they need.  If the share price drops, they would need to issue more shares for the same amount of money – and dilute existing owners' share of the overall equity further. Also, consider corporate acquisitions:  When one company wants to buy another, instead of the transaction being entirely in cash (maybe they don't have that much in the bank!), there's often an equity component, which involves swapping shares of the company being acquired for new shares in the acquiring company or merged company.  In that case, the values of the shares in the public marketplace also matter, to provide relative valuations for the companies, etc. "Sycamore Partners ""saves"" brick and mortars from the ultimate death. By going private, these companies do not face the pressure of Wall Street and they can usually be saved and turn around a profit ( The Limited and Talbots are a few saved consumer shops)" "Matt explains the study numbers in his answer, but those are the valuation of the brand, not the value of the company or how ""rich"" the company is.   Presuming that you're asking the value of the company, the usual way for a publicly traded company to be valued is by the market capitalization (1).  Market capitalization is a fairly simple measure, basically the total value of all the shares of stock in that company. You can find the market cap for any publicly traded company on any of the usual finance sites like Google Finance or Yahoo Finance. If by rich you mean the total value of assets (assets being all property, including cash, real property, equipment, and licenses) a company owns, that information is included in a publicly traded company's quarterly SEC filing and investor releases, but isn't usually listed on the popular finance sites. An example can be seen at Duke Energy's Investor Relation Site (the same information can be found for all companies on EDGAR, the SEC's search tool).  If you open the most recent 8-K (quarterly filing), and go to page 8, you can see that they have $33B+ in assets, and a high level breakdown of those. Note that the numbers are given in millions of dollars For a privately held company this information may or may not be available and you'd have to track it down if it is available. I picked Duke Energy because it's the first thing that popped into my mind.  I have no affiliation with Duke, and I don't directly own any of their stock." Firstly it is completely legal for a company to buy its own shares, I don't believe it would be legal to do so secretly. It would also be very difficult to do that secretly.   So hypothetically we have a company Johnbbob Inc. It doesn't have any assets other than $100 in a bank account and there are 100 shares each owned by a different person. Each share would be worth $1. So the company decides to buy one share. Now there is $99 in the account and 99 shares, each share is still worth $1. So the company continues to buy shares until there is only one share left and $1 in the account. If the company buys that last share it will no longer have any assets and will cease to exist, effectively dissolving the company.  TL:DR it is called dissolving the company or dissolution and it happens fairly often with limited liability corporations. What I think was being asked (and so this is how I interpreted it) is not the transition from public to private, but a corporation itself buying all its shares back, and as a result having no shareholders.  In this case we could envision that all outstanding shares would be become treasury stock.  My argument was that this would never happen in a practical setting.  Obviously, if you interpret the question differently, for instance to be about all the shares of firm being purchased by someone else (as in a private equity buyout), you get very different answers about practicality.  So I'm not disagreeing with you at all, I just read the question differently. Yes that is the case for the public company approach, but I was referring to the transaction approach:   Firm A and Firm B both have $100 in EBITDA. Firm A has $50 in cash, Firm B has $100 in cash.  Firm A sells for $500, Firm B sells for $600.  If we didn't subtract cash before calculating the multiple: Firm A: 5x Firm B: 6x  If we DO subtract cash before calculating the multiple: Firm A: 4.5x Firm B: 5x  So yea, subtracting cash does skew the multiple. I work for an investment group in Central Asia in private equity/project investment. We use SPV and collateralized convertible loans to enter a project, we issue the loan at our own commercial bank. For each industry, the exact mechanisms vary. In most outcomes, we end up in control of some very important part of the business, and even if we have minority shares on paper, no decision is made w/o our approval.  For example, we enter cosntruction projects via aquisiton of land and pledging the land as equity for an SPV, then renting it to the project operator.   Basically, when you enter a business, be in control of the decisions there, or have significant leverage on the operations. Have your own operating professionals to run it. Profit. "Many thanks for thedetailed  response, appreciate it. But I am still not clear on the distinction between a public company and the equity holders. Isn't a public company = shareholders + equity holders? Or do you mean ""company"" = shareholders+equity holders + debt holders?" The process would look something like:  1. Register your investment company with the SEC 2. Get the ETF approved by the SEC  3. Get a custodian bank (likely requires min assets of a few million) 4. Get listed on an exchange like NYSEARCA by meeting requirements and have an IPO   1 and 2 probably require a lot of time and fees and would be wise to have a lawyer advising, 3 is obviously difficult due to asset requirements and 4 would probably involve an investment bank plus more fees Usually their PE ratio will just be listed as 0 or blank.  Though I've always wondered why they don't just list the negative PE as from a straight math standpoint it makes sense. PE while it can be a useful barometer for a company, but certainly does not tell you everything.  A company could have negative earnings for a lot of reasons, some good and some bad.  The company could just be a bad company and could be losing money hand over fist, or the company could have had a one time occurrence such as a big acquisition or some other event that just affected this years earnings, or they could be an awesome high growth company that is heavily investing for their future and forgoing locking in profits now for much bigger profits in the future. Generally IPO company's fall into that last category as they are going public usually because they want an influx of cash that they are going to use to grow the company much more rapidly.  So they are likely already taking all incoming $$ and taking on debt to grow the company and have exceeded all of those options and that's when they turn to the stock market for the additional influx of cash, so it is very common for these companies not to have earnings.   Now you just have to decide if that company is investing that money wisely and will in the future translate to actual earnings. "To know if a stock is undervalued is not something that can be easily assessed (else, everybody would know which stock is undervalued and everybody will buy it until it reaches its ""true"" value). But there are methods to assess the value of a company, I think that the 3 most known methods are: If the assets of the company were to be sold right now and that all its   debts were to be paid back right now, how much will be left? This   remaining amount would be the fundamental value of your company. That method could work well on real estate company whose value is more or less the buildings that they own minus of much they borrowed to acquire them. It's not really usefull in the case of Facebook, as most of its business is immaterial. I know the value of several companies of the same sector, so if I want   to assess the value of another company of this sector I just have to   compare it to the others. For example, you find out that simiral internet companies are being traded at a price that is 15 times their projected dividends (its called a Price Earning Ratio). Then, if you see that Facebook, all else being equal, is trading at 10 times its projected dividends, you could say that buying it would be at a discount. A company is worth as much as the cash flow that it will give me in   the future If you think that facebook will give some dividends for a certain period of time, then you compute their present value (this means finding how much you should put in a bank account today to have the same amount in the future, this can be done by dividing the amount by some interest rates). So, if you think that holding a share of a Facebook for a long period of time would give you (at present value) 100 and that the share of the Facebook is being traded at 70, then buy it. There is another well known method, a more quantitative one, this is the Capital Asset Pricing Model. I won't go into the details of this one, but its about looking at how a company should be priced relatively to a benchmark of other companies. Also there are a lot's of factor that could affect the price of a company and make it strays away from its fundamental value: crisis, interest rates, regulation, price of oil, bad management, ..... And even by applying the previous methods, the fundemantal value itself will remain speculative and you can never be sure of it. And saying that you are buying at a discount will remain an opinion. After that, to price companies, you are likely to understand financial analysis, corporate finance and a bit of macroeconomy." "Lots of questions: In general, no. Market Capitalization and Equity represent 2 different things.  Equity first, the equity of a firm is the value of the assets (what it owns) less its liabilities (what it owes) and consists (broadly) of two components - share capital (what the firm gets when it sells to investors as part of an IPO or subsequent share issue) and retained earnings (what the firm has as a result of making profits and not paying them out as dividends). This is the theoretical liquidation value of the firm - what it is worth if it stops trading, sells all its assets and pays all its debts. Market Capitalization is the current value of the future cash flow of the firm as perceived by the market - the value today of all the dividends that the firm will pay in the future for as long as it exists. This is the theoretical going concern value of the firm - what it is worth as a functioning business. In general, Market Capitalization is bigger than Equity - if it isn't the firm is worth more as scrap than as an operating business. Um ... no. If you don't have any shares then you are by definition not an owner. Having shares is what makes you an owner. What I think you mean is, is it possible for the owner(s) of a private company to sell all of its shares when it goes public? The answer is yes. It is uncommon for a start-up owner to do this but it is standard practice for ""corporate raiders"" who buy failing companies, take them private, restructure them and then take them public again - they have done their job and they are not interested in maintaining an ownership stake. Nope. See above and below. Not at all, equity is an accounting construct and market capitalization is about market sentiment. Consider the following hypothetical firm: It has $1m in equity, it makes $4m in profit and will do for the foreseeable future, it pays all of that $4m out as dividends - if we work on a simple ROI of 10% then this firm is worth $40m dollars - way more than its equity." "Discussing individual stocks is discouraged here, so I'll make my answer somewhat generic. Keep in mind, some companies go public in a way that takes the shares that are held by the investment VCs (venture capitalists) and cashes them out of their positions, i.e. most if not all shares are made public. In that case, the day after IPO, the original investors have their money, and, short of the risk of being sued for fraud, could not care less what the stock does.  Other companies float a small portion up front, and retain the rest. This is a way of creating a market and valuing the company, but not floating so many shares the market has trouble absorbing it. This stock has a ""Shares Outstanding"" of 2.74B but has only floated 757.21M. The nearly 2 billion shares held by the original investors certainly impact their wallets with how this IPO went.  See the key statistics for the details." To me this sounds like a transaction, where E already owns a company worth 400k and can therefore pocket the money from D and give D 25% of the profits every year. There is nothing objective (like a piece of paper) that states the company is worth 400K. It is all about perceived value. Some investors may think it is worth something because of some knowledge they may have. Heck, the company could be worth nothing but the investor could have some sentimental value associated to it. So is it actually the case that E's company is worth 400k only AFTER the transaction? It is worth what someone pays for it when they pay for it. I repeat- the 400K valuation is subjective. In return the investor is getting 25% ownership of the product or company. The idea is that when someone has ownership, they have a vested interest in it being successful. In that case, the investor will do whatever he/she can to improve the chances of success (in addition to supplying the 100K capital). For instance, the investor will leverage their network or perhaps put more money into it in the future. Is the 100k added to the balance sheet as cash? Perhaps. It is an asset that may later be used to fund inventory (for instance). ... and would the other 300k be listed as an IP asset? No. See what I said about the valuation just being perception. Note that the above analysis doesn't apply to all Dragons Den deals. It only applies to situations where capital is exchanged for ownership in the form of equity.