• June 24, 2016

Elementary: Business Valuation

 

How do you value your company? What is the easiest way to run business valuation? I had earlier promised that I would walk you through how to value your company. This is the first step to fulfilling my promise. Trust me, it can be tougher than this with lots and loads of metrics. But let’s understand the basics. For the purpose of understanding, let’s assume that you run a small company and all you make shoes in Oshodi. You have your tools and machines. Tool A, B and C. And Machine C, D and E. One beautiful morning, someone walks up to you and offers to buy your company. Wow.. You have actually been considering letting go of the business to do something else. At that time, you decided, to sum up, all your assets; I mean Tool A, B, and C and Machine C, D and E- everything summed up at 5000USD. Is that the value of your business? Will you then sell your business for 5000USD? Maybe not! Your company valuation isn’t the sum of your assets! Do not get it wrong.

How about if the business offers you 30,000USD as net profit or cash flow? That means you sell the company for 5000USD but loss 30,000USD every year. WTF! So, if I want to convince you to give up 30,000USD every year, how much would I have to pay you? Simple, I must give you enough money to deposit in the bank so that the bank can give you an interest of 30,000USD per year! That way, you can still have your 30,000USD per year even if you don’t have your shoe company again. If bank interest rates are 10%, then you will need to deposit 300,000USD into the bank to give you your 30,000 per year! 30,000USD is equal to 10% of 300,000USD

So now, the value of your business isn’t the value of its asset but its earnings. Trust me, this may be more technical than this especially when we come to play in private selling or the stock market.

But stay with me, I will demystify some things.

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