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Valuing your business

Objectively valuing your business is an arduous task for any entrepreneur. Whereas valuators see a functioning business, you see a brainchild that had you awake for sleepless nights years-on-end to get to this point. Valuations are a tricky feature of business, and an ability to understand valuations can be the difference between rapid success and going on in a stasis.

The importance of valuing your company (objectively)
The objective of building your own business is to make significant material changes in the development your wealth-basket. The nuts and bolts are that even though dividends and other annuity income (eg: salaries) keep you going, the best (and most profitable way) of making a return on your business is through selling your company to a high bidder aka exiting. 

Exits is are hinged on the valuation the sellers and the potential bidders can settle on. Whereas perceived value and goodwill play a strong role in the eyes of the entrepreneur, those intangibles must match the financials presented to provide a conclusive, slam-dunk story which can see you gain full realizable value for your hard work.

Valuation methods:

Discounted Cash Flows:
This method is used to estimate the value of an investment by presenting a net present value (“NPV”) of expected future cash flows using a discount rate (“R”). NPV is the investment amount drawdown, which is invested, R is the rate of return / interest rate expected during the investment lifetime. DCF is calculated as below: 

(CF/(1+R)^1) + (CF/(1+R)^2) …
Type of company: Cash-landen / cash-generating business
Pros: Close to actual intrinsic value of proposed business
Cons: Great sensitivity to discount rate assumptions

Net Asset Value:
This method calculates the total value of a business’ asset minus the total value of a business’ liabilities. NAV is calculated as below:

Assets – Liabilities
Type of company: Asset-landen company / large capital expenditure reliant business
Pros: Adjustments can favour the asset holder
Cons: Does not consider future earnings growth potential

Earnings Multiple:
This method reflects risk attached to future earnings growth potential by using a company’s earnings before interest, depreciation and amortisation (known as Free Cash Flow) to assumes the enterprise value of the business. Earning multiples are calculated as below: 

Multiple of 4 
(Net income + Interest Expense + Tax + Depreciation + Amortisation) * 4x

Type of company: Company with high current and future earnings potential
Pros: Adjustment of multiple can increase valuation dramatically
Cons: Multiple is a discretionary value needed to be agreed by seller and buyer

Whether it’s for that sweet early retirement package in the Bahamas, or needing to raise additional funding, inevitably you will need to assign a value your business. The more knowledge you have on the various valuation methods, the more ammunition you have to accrue greater value for your sleepless nights.

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