Valuation
Valuation is a science and an art. There are complicated formulas as well as subjective decisions to be made. A valuation can be qualitative and a gut feeling. There is a lot involved in the valuation of a business.
Generally, if one is selling a business, they are going to want a high valuation. In preparation for the sale, a founder would want to show a loyal customer base and excellent working capital. On the other hand, if they purchase a business, they would want to see a lower valuation.
In addition to the sale of the business, valuation is necessary when funding a business. Founders and buyers are utilizing numbers to give their best guess at the future value of the company. Discounted cash flow considers inflation, so it is an excellent method to determine a possible investor’s equity disbursement.
Even though the valuation is quantitative, there are multiple methods for determining a final number. Because of the complexities of a business’s valuation, one would want to have a good accountant on their side. Some of the valuation methods discussed in the book “Entrepreneurial Finance (2014)” are multipliers, price/earnings ratio, free cash flow valuation, and asset valuation. Other sources list market capitalization and discounted cash flow (DCF) as methods of valuation.
There are many methods to come to the value that best benefit the party’s interest. Knowing that it is not exact science can help a founder at various stages of its maturity.
Rogers, S. (2014), Entrepreneurial Finance, McGraw-Hill Education, ISBN 978-0-07-182539-9
Hayes, A. (2020), https://www.investopedia.com/terms/b/business-valuation.asp, Retrieved on 9/18/2020
Master of Entrepreneurship Website for Mike Weimar 