Remember that “market multiples” are only indicators of value – the do not explain value. Also detailed information on small and mid-sized deals is patchily available. Starts up businesses have no historic perfo rmance for the comparison.
In other words what is your business truly worth based on its strategy and vision, and the financial forecasts - for this your business plan needs to be convincing, it is the vehicle to communicate your business to buyers, investors or valuers.
Its often the non financial assets that will persuade people of its lasting value - strongth of customer base, intellectual property, product pipeline, asset base and so on.
To make your plan believable your forecasts must be believable. If you have an existing business its well worth developing a credible track record of forecasting its performance. Then when you ask someone to value it based on a forecast they can take comfort from your ability to predict the performance of the company.
Terminal Value and Cost of Capital.
If you’re at all considering using DCF in the valuation you must give serious consideration to the terminal value. How will it be arrived at – are you assuming continuing business and a going concern sale, or a liquidation? What are the tax consequences, and execution costs of your planned approach? The valuation needs to reflect the net cash flows. The DCF calculation will be critically dependent on the chosen cost of capital – can you work out a realistic cost of capital to represent your opportunity cost for a similar investment?
Get it done properly
If the valuation of your business is going to be important – your raising finance or planning your exit for example – then its really worthwhile getting a professional valuation. A decent professional valuer will take the time to get to know you and your business, will assess the factors above, and give you a reasoned and nuanced view on what your business could be worth. Beware the cheap online valuation – you pop some numbers in a form, give them your credit card number and it spews out a pro-forma valuation report. This is of course entirely mechanistic, and while it may be right, its more likely not to be. After all a stopped clock shows the correct time twice a day!
The benefits of doing this properly
You get to understand what drives the value of your business, and so can influence your strategy and tactics accordingly, you can use this information for finance raising, and sometimes for negotiations with the tax man too.