Valuation involves estimating the worth or price of a company. Different industries use different methods to determine this value. Some industries use complicated quantitative models, while others use relatively simple approaches. Regardless of the methodology used, however, the valuation of a business incorporates not only a financial analysis of the company, but also a subjective assessment of other factors that may be difficult to quantify, including:
- Stage of the company
- Management team assessment
- Industry
- Reason the company is being sold
- Other general macroeconomic factors
There are numerous reasons why an entrepreneur should know the value of her business. These include:
- To determine a sale price for the company
- To determine how much equity to give up for partnership agreements
- To determine how much equity to give up for investor capital
As noted earlier, the value of a business is influenced by a multitude of factors, qualitative as well as quantitative. Before a final value for any company can be determined, the entrepreneur must identify and review these factors. This procedure is commonly referred to as completing a “contextual factor analysis.” In other words, what is the general context in which the valuation is taking place? A proper valuation of a company does not occur in a vacuum. A solid valuation contextual factor analysis should include the following factors:
- The historical, present, and projected cash flow of the company.
- Who is valuing the company?
- Is it a private or a public company?
- The availability of capital.
- Is it a strategic or a financial buyer?
- The company’s stage of entrepreneurship.
- Is the company being sold at an auction?
- The state of the economy.
- The reason the company is being valued.
- Tangible and intangible assets.
- The industry.
- The quality of the management team.
- Projected performance.
Ultimately, the value of a company is driven by the present and projected cash flows, which are affected by all the factors just mentioned. As Bill Sutter, a former venture capitalist, said to a class of MBA students, “Where does value come from? Cash flow. It does not come from assets or revenues. It comes from cash flow.”
REFERENCES
Steven Rogers ‘’Entrepreneurial Finance: Finance and Business Strategies for the Serious Entrepreneur’’ (2009: McGraw-Hill)
