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 PE multiples.
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
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