The business valuation is something that all managers and founders should have an eye on. A business valuation helps establish a baseline value which enables you to create more informed financial goals, business strategies and marketing objectives. Annual business valuations allow you to understand your company's potential for growth and innovation.
It is very important to understand that the company valuation is an uncertain science, but if you want to sell your company it is essential to make a careful and strict valuation that gives you elements to raise a good negotiation with your potential buyers. in the context of investment, the buyer is always going to use a method to demonstrate that the value of your company is lower, and the seller will use the method that shows that the value is higher.
Which valuation methodology does Numberslides use?
There are a number of methods to value a company - using discounted cash flows, perpetual growth, multiples of EBITDA or Revenue or a Scorecard methodology to name a few. In Numberslides, we use the perpetual growth methodology to derive a "Terminal Value".
For this we must first calculated the Free cash flows to the firm, FCF, are the cash flows left over after the firm has paid all of its expenses and made all necessary investments to keep the firm operating at its current level. This is also know as the "Unlevered Cash Flows" as this is before the impact of using debt finance (in other words, using someone else's money outside of the company cap table).
The perpetuity growth model assumes that cash flow values grow at a constant rate ad infinitum. Terminal Value (TV) is the present value (the value today) of all future cash flows, with the assumption of perpetual stable growth. This is the basis for your business valuation. The formula is outlined below:
In financial analysis, this Terminal Value includes the value of all future cash flows even when they are not considered in a particular forecast period and captures the value that is otherwise difficult to predict.
Which perpetual growth rate to choose?
The perpetuity growth rate is usually equivalent to the inflation rate and almost always less than the economy’s growth rate. This is one of the core limitations of using this methodology as it is difficult to predict an accurate growth rate so we suggest it is best to air on the side of caution...
How can I increase the valuation?
Simplistically, there are a number of levers to increase the valuation which we have highlighted below:
- Improve the ability of the company to generate cash flow by increasing revenues or reducing expenses.
- Reduce the company's risk. The reduction of risk lowers the company's cost of capital and increases value.
Valuation & Numberslides?
The Numberslides forecasts help you build a clear understanding of what activities add to the business valuation and what reduces it. If a proposed activity does not increase expected cash flows or reduce risk, it probably does not enhance value.