There are two important reasons as to why I chose this topic. The first is that, as a Financial Officer of a privately owned SME, I have been asked several times to analyze the potential value of projects and acquisitions.  In order to set up a proper valuation model for privately owned companies I decided to choose this topic about which little is written. The second reason for writing a thesis about valuation is to help people unfamiliar with finance to understand its importance and how to arrive logically at a fair value of an asset. The first chapter basically introduces valuation and some basic information in order to better understand the case study.  For the above-mentioned purposes the essay goes through the building process of a valuation model, mixing theory with a practical example. For the theoretical framework I tried to get from the most important books on valuation (as in the literature review) the most clearly explained descriptions of the basic concepts.  For the case study I opted to analyze an acquisition of a privately owned SME by a Venture Capital firm through a Leveraged Buy-Out. Although the thesis discusses different valuation approaches, the main part covers Discount Cash Flow analysis (how to forecast cash flows, how to evaluate and measure the Weighted Average Cost of Capital -WACC- and risk associated with an investment, and how, finally, to arrive at a fair value).  The valuation analysis process is concluded with relative valuation based on EV/EBITDA multiples (of public listed companies and recent transactions), so as to compare the result of the DCF approach. The dissertation is concluded with the method to finance the acquisition. I thought it would be interesting to discuss a leveraged buy-out transaction, and introduce the concept of mezzanine financing. The result shows how, with accurate and well defined assumptions, the DCF is the approach that gives a result closer to the hypothetical “fair value” and, compared with the other evaluation approaches,  sets up the ceiling of a “Bid Price” for an asset. In the appendix, I explain some basic concepts useful for the reading of the essay for non-finance professionals. 

Author info and background

Gianvico Pocci was born in Rome in 1972, graduated in Business Economics at the University of Rome La Sapienza in 1996, and obtained a Master of Business Administration at the University of Malta, Link Campus, in 2006, presenting a thesis on "The financial aspects of valuation and appraisal in the acquisition of a private firm: a case study". He started his professional career in Banking Sector working in London for Banca di Roma. In 1999 he moved to the asset management unit of the bank becoming the equity portfolio manager responsible for Asian markets. In 2004 he moved to Interservice SpA, an engineering company, as a CFO, the position he currently retains.

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