Business Valuation Basics
A vital part of the venture financing investment procedure is the valuation of the company enterprise. Valuation is a vital input into the negotiation process that is given to the venture financing investor in return. There are an assortment of valuation methods, each with strengths and their weaknesses. The valuation methods that were most used are: Comparables – The Net Present Worth Strategy – The Venture Capital Strategy – Comparables – Much like property valuations, a company’s value may be projected through comparisons with businesses. There are various things to consider in picking similar companies like size, growth rate, hazard profile, capital construction, etc.
Therefore caution has to be exercised when utilizing this method. Another consideration is unless the comparable is a public company that it could be difficult to get information for companies. Another caveat when comparing a business is that the business that is public is likely to enjoy a valuation that is higher because of being traded due to its liquidity. Net Present Value Strategy – The Net Present Value Strategy involves calculating the net current value of the projected cash flows anticipated to be produced by a company over a specified time horizon or analysis interval and the estimate of the net current worth of a terminal worth of the business towards the end of the study period.
The net current worth of that the projected cash flows is calculated utilizing the Weighted Average Cost of Capital of the company in its optimal capital structure. Step 1: Calculate Net Present Worth of Annual Cash Flows – Cash Flow for each future interval in the time horizon or study interval of the investigation is defined as follows: CFn = EBITn + DEPRn CAPEXn .CNWCn – Where: CF = cash flow or free cash flow. N = the specified future time interval in the study interval – EBITn = earnings before interest and taxes – t = that the corporate tax rate – DEPRn = depreciation costs for the period – CAPEXn = financing expenditures for the period – .NWCn = increase in net working financing for the period – It must be noted the fact that interest expense is factored out from the money flow formula by using EBIT. It is since the discount rate that’s utilized to find the net current worth of that the cash flows is that the WACC. The WACC uses that the after tax cost of debt, that takes into account the tax shields the fact that are the result of the tax deductibility of interest.