Unit 09 · Case
Buying Out the Founder
Company Valuation: Discounted Cash Flow · Kenya · KSh
This is the student brief. The instructor guide is distributed separately.
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The Njoroge family runs a small Nairobi holding company. They own a building-materials distributor and a printing business, and they look for additional businesses to buy when good ones come up.
They have been offered Rift Valley Cooling Limited — a commercial refrigeration and air-conditioning contractor that installs and maintains cold rooms for supermarkets and food processors, and air conditioning for office buildings.
The company is eighteen years old with thirty-two staff. About fifty-five percent of revenue comes from annual service contracts on equipment it installed; the rest is new installation work. Revenue last year was KSh 840 million.
The founder is sixty-four, wants to retire, and is asking KSh 480 million for one hundred percent of the equity. He wants an answer within sixty days.
The Njoroges have made clear they are comfortable walking away.
Exhibit 1 · Free cash flow to the firm, as forecast
| Line | Y1 | Y2 | Y3 | Y4 | Y5 |
|---|---|---|---|---|---|
| Revenue | 890.0 | 943.4 | 1,000.0 | 1,060.0 | 1,123.6 |
| EBIT at 9% | 80.10 | 84.91 | 90.00 | 95.40 | 101.12 |
| Tax at 30% | (24.03) | (25.47) | (27.00) | (28.62) | (30.34) |
| After-tax EBIT | 56.07 | 59.43 | 63.00 | 66.78 | 70.79 |
| Add depreciation | 18.00 | 18.00 | 18.00 | 18.00 | 18.00 |
| Less capital expenditure | (24.00) | (24.00) | (24.00) | (24.00) | (24.00) |
| Less increase in working capital | (6.00) | (6.41) | (6.79) | (7.20) | (7.63) |
| FREE CASH FLOW TO THE FIRM | 44.07 | 47.03 | 50.21 | 53.58 | 57.16 |
The present value of Years 1 to 5 at 16% is KSh 161.91m. Note that capital expenditure exceeds depreciation every year — this business has to keep investing to stay the size it is.
Exhibit 2 · Valuation assumptions and the bridge
| Item | Value |
|---|---|
| Weighted average cost of capital | 16% |
| Long-run growth after Year 5 | 7% |
| Exit multiple, comparable transactions | 5.0× to 6.0× EBITDA |
| Year-5 discount factor at 16% | 0.4761 |
| Item | Value |
|---|---|
| Cash and equivalents | 22 |
| Bank debt | 65 |
| Plot of land at Athi River, held for sale and not used in the business | 35 |
| Minority interests | none |
Exhibit 3 · Equity value across WACC and growth
| WACC \ growth | 6% | 7% | 8% |
|---|---|---|---|
| 14% | 555.5 | 615.9 | 696.5 |
| 16% | 442.4 | 477.4 | 521.3 |
| 18% | 367.0 | 389.3 | 416.1 |
Question 1 · 15 minutes
Compute the enterprise value two ways: using the perpetuity terminal value, and using an exit multiple of 5.5× Year-5 EBITDA.
Then bridge the perpetuity figure to equity value and compare it with the asking price.
One check worth doing: what exit multiple does the perpetuity terminal value imply?
Question 2 · 13 minutes
Read Exhibit 3. At which combinations does the equity value fall below the KSh 480 million asking price?
Which of the two assumptions does the decision actually depend on — and by how much more than the other?
Question 3 · 9 minutes
What do you recommend to the Njoroges, and at what price would you walk away?
Then: the founder is sixty-four and leaving, and fifty-five percent of revenue sits in service contracts. Exhibit 3 does not capture that risk at all. Explain why not, and propose a deal structure that would address it.