The valuations put on businesses are typically a calculation based on future earnings, a financial calculation that has always been the basis of company valuations.
We understand it well. Take current earnings and multiply them by a multiple that represents a picture of future earnings. Do some cash flow projections, and apply some risk factors to them, punch out a NPV and IRR calculations, and bingo, a value.
The financial value of a business.
However, that does not explain the valuations that some businesses reflect when they are sold.
The most obvious example is Instagram, bought by Facebook for a billion dollars in 2012 when it was little more than a startup in a garage with 13 employees and 30 million users. Today it has almost a billon users, still growing by leaps and bounds daily, and some put the value north of $50 billion.
The reason it was worth so much at the time, way beyond any financial calculation was its strategic value to Facebook. Instagram had found the mobile crack in desk bound Facebooks amour, and plugging it in a world that was converting to mobile at geometric rates was essential. Hence the strategic value of Instagram.
The same sort of situation faced Google when they were considering YouTube. Its financial value was zero, perhaps negative given the exposure to lawsuits, but Google paid $1.7 billion for it in 2006 when it was still in the garage. Why? Guess what the second most used search tool in the world is today, yes YouTube. Google was simply protecting its position as the giant in search from a potential intruder, and it had nothing to do with the potential of YouTube to make money.
What is your business worth?
Go to most competent accountants or business brokers and they will give you a range based on the financial parameters and what similar businesses have sold for recently. Easy if you are selling a hairdresser or metal bashing business, but harder when there are few similar businesses being sold.
In that case there is a lot more research and strategic thinking required to uncover the hidden strategic value your business may have to someone, usually unexpected.
Start digging well before the day comes when you want to sell, it may take a while!
