History Shows That Cash Is King: What really matters when it comes to investing? Back in the early 2000s many internet businesses started springing up all over the web. Many of these businesses were small companies working out of their home or a small shop and they offered products at a discount. In order to draw attention to themselves these companies were accepting a loss on the products they were selling, but the amount of volume they were experience was out of the roof. It was the volume that attracted many investors. The mentality was that if the companies were doing this amount of volume then it would eventually become highly profitable. Once the DOT COM bobble popped and they realized how silly the valuations were the investors started to realize even further that cash really is king.
What Really Creates Value: When an investor risks the hard earned capital in an opportunity he or she is looking for a healthy return on the investment. When one buys a bond the Net Present Value (NPV) of the bond is based on the expectations of future cash flows. The expectations are then discounted using a present valuation formula and that provides the value.
Issues With The NPV Method of Valuing A Business: Probably the biggest issues with valuing a company is dealing with the number of variables included in the calculation. When you value a bond the numbers are pretty straight forward because the coupon shows what the future payments will be while the market rate show what to discount the bond by; both numbers are a given. When valuing a company you look at current and historical cash flow and you look into the market potential in order to project/make and educated guess on what the cash flows will be. Essentially the rearview mirror is used to drive forward. Then, you come up with discount rate. This is one point that is probably the biggest guess of them all. What are the future cash flows worth to you?
Using An EBITDA Multiple: Rather than dealing with all of the guessing games to value a business many investors will start with an adjusted EBITDA multiple of approximately 4x. After reviewing the company they will adjust that number up or down based on the future expectations of cash flow, risk, and market expectations. While it is not as sophisticated, it is actually widely used within the industry.
If you are curious about the value of your business and would like a free consultation on how Deal Capital can assist you in the acquisition or merge of your company contact us now. Deal Capital has had a large amount of experience with previous transactions all over the U.S. and in various parts of Canada that has helped its professionals to understand key indicators associated in valuing in your industry.