What Is Your Business Worth?
Find out how to value your privately held business.
Most financial professionals will admit there's as much
qualitative input as there is quantitative number-crunching
when it comes to performing valuations. Even when two
valuators do agree on the methodology, they may vary on
the assumptions used in that model and then arrive at
very different values for the firm. So it requires a blend
of pro forma cash flows, tangible assets, financial and
industry ratios, earnings multiples and a wide range of
"comps," all shaded by investor sentiment, personal
gut feeling and a healthy dose of reasonableness.
Valuation can be derived from any combination of the
following eight models:
- Net assets after all debts are excluded
- Net liquidation at fair market pricing
- Replacement costs at existing market levels
- Adjusted goodwill on excess earnings
- Recent comparable sale price
- Comparable public company price
- Comparable price-earnings multiple
- Present value of after-tax cash flow
A good choice is to start with the discounted present
value of the after-tax cash flow and compare that to recent
sales of similar firms. Then look at the market capitalization
of similar publicly traded firms and similar industry
Be sure the valuation passes the critical test of reasonableness.
Does the value accurately reflect the company, industry-risks
and expected returns for the future? Whatever you come up with
determines how much equity you'll relinquish to the funding group
and how much stock you'll have left for subsequent rounds of growth
capital in the future. Concessions on valuation might be necessary
to keep forward momentum in your operations, but in the end, make
sure the final value truly makes sense.
Author: David Newton