I went to a workshop given by Richard Smith of Integral Finance at the BioHub in Alderley Park the other week. “The Science of Valuation” was organised by the BioHub Acceleration Manager, part of a series of workshops to support established businesses. Valuing your business is an important step if you need investment or are looking at divestment or acquisition.
Sunk Costs – based on spend to date. A multiple of that spend will be used to estimate the value of the business. That multiple may be less than one!
Sum of the Parts – the value is assumed to be the sum of all the business’s assets. So basically a fire sale and only really useful if the business has substantial assets to sell off.
Multiples – uses financial indicators and applies a multiple depending on industry standards. So assumes the business has no uniqueness.
Comparables – considers a similar company that went through similar development and extrapolates value. So benchmarking, and again assumes no uniqueness.
Discounted Cash Flow – generally considered to be one of the most useful methods of company valuation. This method takes the cash generated over a period of time, then discounts it (because cash buys less in the future). The discount rate can be very severe – 70% in some cases and will reflect the level of risk involved.
Richard gave a great presentation and it was very obvious that his field is complex. Setting aside the complexities, some important messages stood out.
As you look to value your business you need to use a method you can stand by. Know the assumptions you’ve used. Make sure they are valid and credible. Apply scientific rigour and sound decision making. Know what methods the other parties are using to value your company.
This will put you on firm ground for discussion. You will be able to negotiate with confidence and better understand the other parties’ position.
* Both quotes are from Warren Buffett