Hi all,
I received an offer by two guys who are interested in becoming partner of my algorithmic trading firm to assist with business development as they have quite long experience from the financial industry.
Now, I've received a "valuation" so as to put a price tag on a 30% stake, however, I'm not sure whether the model used is appropriate since it's the first time I'm doing this exercise (see below).
First of all, the valuation model only takes existing size into consideration, and not the fact that the AUM is growing rather fast (5-10x per year), also the current offer applies a very conservative 30% ROC, whereas it was almost 80% for 2014. Also the final clause which seems to put any shortfall on profits on me as founder seems very risky - shouldn't you as an investor shoulder such risk?!
Thanks in advance for your comments.
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1. Facts:
a. AUM of $3.5M as of Feb. 2015
b. Methodology: 4 times EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization – essentially net income)
i. This multiple of 4 times can be discussed further but it is not an unusual multiple but typically there would be a discount of approximately 20 to 30% applied because it is private and there is no ready market to sell into.
c. Management Fee of 2% and Incentive Fee of 20%
i. Management Fee: $70,000 = $3.5M x .02
ii. Incentive Fee: $210,000 = $3.5M x .3 (30% Assumed Return) x .2 (20% Incentive Fee)
iii. Gross Earnings: $280,000
2. Valuation as of Feb. 2015
a. Gross Valuation of XYZ, LLC as of Feb. 2015 is $1,120,000 which is 4 times $280,000 (Gross Earnings).
i. This valuation will need to be adjusted with more accurate information and does not include expenses, which would adjust down the valuation.
b. Proposed 30% interest of Investment Manager is approximately $336,000.
3. Proposed Option Agreement re Purchase of XYZ, LLC
a. Structure: The purchasing parties will have the guaranteed option to purchase an interest in the investment manager based on the valuation as of Feb. 2015 and proposed valuation methodology. Further, once the option agreement is exercised, all distributions made as of Feb. 2015, if any, on a pro-rata basis, will offset the purchase price. In the event of a resulting negative capital account, the new managing member will have the option to have the investment manager carry the negative capital account balance until it is fully offset by future distributions or the new managing member may apply paid in capital in the amount of such negative capital account balance at the date of purchase or a later date.
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I received an offer by two guys who are interested in becoming partner of my algorithmic trading firm to assist with business development as they have quite long experience from the financial industry.
Now, I've received a "valuation" so as to put a price tag on a 30% stake, however, I'm not sure whether the model used is appropriate since it's the first time I'm doing this exercise (see below).
First of all, the valuation model only takes existing size into consideration, and not the fact that the AUM is growing rather fast (5-10x per year), also the current offer applies a very conservative 30% ROC, whereas it was almost 80% for 2014. Also the final clause which seems to put any shortfall on profits on me as founder seems very risky - shouldn't you as an investor shoulder such risk?!
Thanks in advance for your comments.
###
1. Facts:
a. AUM of $3.5M as of Feb. 2015
b. Methodology: 4 times EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization – essentially net income)
i. This multiple of 4 times can be discussed further but it is not an unusual multiple but typically there would be a discount of approximately 20 to 30% applied because it is private and there is no ready market to sell into.
c. Management Fee of 2% and Incentive Fee of 20%
i. Management Fee: $70,000 = $3.5M x .02
ii. Incentive Fee: $210,000 = $3.5M x .3 (30% Assumed Return) x .2 (20% Incentive Fee)
iii. Gross Earnings: $280,000
2. Valuation as of Feb. 2015
a. Gross Valuation of XYZ, LLC as of Feb. 2015 is $1,120,000 which is 4 times $280,000 (Gross Earnings).
i. This valuation will need to be adjusted with more accurate information and does not include expenses, which would adjust down the valuation.
b. Proposed 30% interest of Investment Manager is approximately $336,000.
3. Proposed Option Agreement re Purchase of XYZ, LLC
a. Structure: The purchasing parties will have the guaranteed option to purchase an interest in the investment manager based on the valuation as of Feb. 2015 and proposed valuation methodology. Further, once the option agreement is exercised, all distributions made as of Feb. 2015, if any, on a pro-rata basis, will offset the purchase price. In the event of a resulting negative capital account, the new managing member will have the option to have the investment manager carry the negative capital account balance until it is fully offset by future distributions or the new managing member may apply paid in capital in the amount of such negative capital account balance at the date of purchase or a later date.
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