Valuing Your Business
By Jack Mixner
Inflated business valuations do not do anyone any good. Taking the time to evaluate your business' value correctly helps you think strategically about what steps to take to increase valuation, especially if you intend to increase the value of your company before placing it on the market. Nevin Sanli of Sanli Pastore & Hill outlines two ways to value a business, the discounted future earnings method and comparable or guideline company approach.The discounted earnings method looks at future earnings by forecasting revenues, expenses, profits and cash flows. Incorporate threats that affect those future earnings into the equation. Using risk factors, analysts adjust future earnings according to the projected threats to the business.
The comparable/guideline approach relies on the selection of comparable or guideline companies in the same industry, the same geographical area and similar in size. Financial performance is important as well. Removing extraordinary items from the financials of the guideline companies makes them useful for the comparison.Which method should you use? Use them both independently. You will end up with two values. If they are significantly different, reevaluate the process followed. If they are the same, check again for missing or incomplete items.
Strategic ImplicationsIt makes sense to value your company before you begin a strategic process. It is a good way to make sure you remember to address strategies that make your company more successful - and valuable, as well.
Reference Sanli, Nevin. How Much is Your Business Worth? http://www.sphvalue.com/pdf/2005howmuch.pdf . 1995.