Page 16 - MIND YOUR ASSET

ANTHONY KAIRUZ

 What is the value of my company?

Valuation is generally considered by:

 Today’s valuation of the company.
 Future-worth.
 Timespan needed to create future value.
 Likelihood of achieving success.

Before seeking capital, business owners must:

 Understand the basic concepts of discounted cash flow.
 The use of market multiples before establishing or negotiating the value for their company.

Understanding how your company will be evaluated and being able to affect the valuation
positively can enable you to get higher valuations and retain greater ownership of your company
when the investment is funded.

There are 3 major ways to figure the price of a small business.

1. Valuing a company based on sales

In certain industries, the norm is to determine value by using a multiplier times the
firm’s/company’s annual sales. The multiplier depends on the exact type of business, the
predictability of sales from year to year and many other factors. Generally, the industry multiplier
is the starting point and is then adjusted based on the specifics of the company.

For example, the industry’s multiplier may be two times sales, but the firm has experienced
strong, consistent growth in the past three years; this may boost the multiplier to 2.5 or higher.
Perhaps the firm has one client that makes up one-half of its billings; the higher perceived risk may
drive the multiplier down to 1.5 or lower.

If your business has low fixed costs, few assets and little retained earnings, the sales multiplier
technique may be appropriate.

2. Valuing a company based on cash flow or profits

Price is based on the company’s ability to generate a stream of profit (which can be defined in
different ways) or cash flow (sales less expenses). The seller then projects this stream of cash over
five or more years to calculate the worth of the business. Often, discounted future earnings are
used which takes into account the time value of money. Cash received in year five is discounted
based on projected interest rates.

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