One of the most challenging tasks you are likely to face when considering an outside investment is how to determine the value of your company.
Referred to by venture capitalists as the post-money valuation, this key step gives you a number of strategic decision data points:
- What the entire company is worth, known as the enterprise value.
- How the business ownership interests are split between the founding team and external investors.
- Whether the founders retain the controlling ownership of the company after the investment has been made.
- Is the investment worth taking given its effect on business value?
Business valuation of a high growth firm – First Chicago Method
Since the infusion of outside capital is likely to change the business earnings prospects going forward, the Discounted Cash Flow method is the standard choice for investment-driven business valuation.
This income-based valuation method lets you focus on the company’s earnings prospects and risk directly. The result is the “present value” of the firm – what it is worth today.
The additional capital can make a major difference to the business’s earnings prospects. Since the future is uncertain, it is best to create a number of forecasts and run your Discounted Cash Flow valuation for each:
- Best case – under the most favorable assumptions of business performance.
- Base or most likely case.
- Worst case – if the business encounters unexpected “head winds” in the near term.
You can view the results as a range of possible business values or average them to come up with a single valuation number.
Business Valuation based on Cash Flow and Risk
Note that this valuation analysis is inherently forward looking and involves a number of subjective assumptions on your part. It is a very good idea to check the market in order to confirm your valuation results. Recent sales of comparable businesses give you an objective evidence of selling prices.
If you relate the business selling prices to the the firms’ financial performance, you can see how the market values these companies. More importantly, using the valuation multiples derived from the market comps you can estimate the market value of your own business.
Valuing a Business based on Market Comps
This combination of the comparative market value analysis and Discounted Cash Flow valuation is known as the First Chicago Method.
The method’s power is in combining the theoretically precise yet subjective business valuation based on its income prospects with a highly objective “reality check” of business market value based on the actual business sales.
You can easily implement the First Chicago method using the ValuAdder business valuation software:
- Select the Market Comps tool for your market-based valuation.
- Create a number of Discounted Cash Flow valuation tools, one for each valuation scenario.
- Calculate your business valuation results.
If you own a land surveying firm or plan to acquire one, here are some interesting industry statistics. Classified under the SIC code 8713 and NAICS 54136, there are some 770 such establishments in the US alone, employing over 11,500.
While the industry as a whole generates $3.1B in annual revenues, the average land surveying company is small business, employing a staff of 14 and making around $3,980,000 in annual gross revenues. In fact, 97% of surveying practices employ fewer than 24 staff!
Business valuation of surveying firms: Market Comps
Established, profitable land surveying practices are highly desirable acquisition targets. Hence, there is considerable market evidence of selling prices for such firms. You can use these Market Comps in order to develop a good idea of what your surveying company is worth.
Valuation multiples calculated from such comparable surverying firm sales lets you related your business financial performance to its potential selling price and, therefore, the company’s fair market value. Here is a list of valuation multiples that are typical in the industry:
- Price to gross revenues
- Price to net sales (less returns and discounts)
- Price to gross profit
- Price to net income
- Price to EBIT
- Price to EBITDA
- Price to seller’s discretionary cash flow (SDCF)
- Price to furniture, fixtures and equipment (FF&E) assets
- Price to total assets
- Price to book value of owners’ equity
You can develop a very comprehensive idea of what your surveying practice is worth by using this set of valuation multiples. See an example of how valuation multiples can be used to value your practice.
Example: using valuation multiples to appraise a surveying firm
To show how the Market Comps and valuation multiples can be used to value a surveying company, let’s pick a hypothetical firm with these financial parameters:
- Annual gross revenue: $500,000
- Net sales: $480,000
- Gross profit: $430,000
- Net income: $40,000
- EBIT: $45,000
- EBITDA: $47,000
- SDCF: $275,000
- FF&E assets: $175,000
- Owners’ equity: $50,000
We apply a set of reasonable valuation multiples and calculate the business value across all 9 financial performance factors. Here are the results:
| Multiple |
Multiple value |
Business value |
| Price to gross revenue |
0.5 |
$250,000 |
| Price to net sales |
0.6 |
$288,000 |
| Price to gross profit |
0.61 |
$262,300 |
| Price to net income |
5.5 |
$220,000 |
| Price to EBIT |
8 |
$360,000 |
| Price to EBITDA |
7 |
$329,000 |
| Price to SDCF |
2 |
$550,000 |
| Price to FF&E assets |
4.1 |
$615,000 |
| Price to total assets |
3.5 |
$612,500 |
| Price to owners equity |
6.75 |
$337,500 |
| Average Business Value |
$382,430 |
Notice that the business value estimates based on the discretionary cash flow and assets are higher than the average. That’s because our example firm excels in its ability to generate positive cash flow and has a relatively high asset base.
Are you using a modern 64 bit computer system? Or do you work on both 32 and 64 bit machines?
Now you can use ValuAdder business valuation software on both types of computers – and get identical performance and accurate business appraisal results.
What makes this magic possible? ValuAdder leverages the Java computing platform to give you the business valuation system that automatically detects your computer’s capabilities to give you top performance.
Tools to determine business value – and maximize your return on investment
You can save time and money by using the same ValuAdder program on your Windows 64 bit systems.
Business valuation software that gives you peak performance
On a MAC computer, you can take full advantage of the MAC OS X system performance.
All this makes your ValuAdder business valuation tools a highly economical investment – you can run the same tools on any computer system and exchange your appraisal results across your entire network – or with clients who work on completely different computers – Windows, Mac OS, Linux or Unix!
For example, you can prepare a business appraisal for a client, then package the entire project using a ValuAdder Scenario, and email it to your client for review. While you may be doing your work on a Windows computer, your client can open and edit the scenario on an Apple MAC.
To make this possible, ValuAdder uses the standard XML format for data exchange.
Our customers ask us often: “what computer systems can I run ValuAdder software on?”
Our answer: any computer you like! This is no exaggeration – you can conduct your business appraisal using ValuAdder software on all versions of Windows, Apple MAC OS, Linux or Unix computer systems.
Industry-standard environment for business valuation software
How is this possible? The short answer is: Java. All ValuAdder software products are built on top of the industry-standard Java 6 computing platform. Invented by Sun Microsystems, Java has become the de-facto standard for enterprise quality software applications world-wide.
Enterprise valuation software quality for businesses large and small
It is used and supported by the Fortune 500 industry leaders including IBM, Oracle, HP, CISCO, Google, eBay and many others. Through the Open Source Java Community Process, Java stays on the cutting edge of software innovation and runs on millions of computers throughout the globe.
What does this mean to you? In short, the proven track record and quality business appraisal software that you can depend on regardless of your choice of a computer system to use.
Business valuation software quality you can rely on
The fact that Java is used by millions of business people gives you a proven platform on which to run your ValuAdder business valuation software tools. Thousands of software engineers contribute to continuous innovation to make Java the most secure, reliable and high performance way to do your business valuation analysis.
You get the same consistent performance and dependable results from ValuAdder whether you run the software on a leading edge Windows machine or earlier versions of Windows.
On a MAC OS X computer ValuAdder looks and behaves as a true Apple application – just as you would expect. And, of course, this includes the latest MAC OS X systems. Thank you, Apple engineering team, for making this possible!
Immediate help as you do your business valuation
State of the art software is nothing unless it offers help right when you need it. Your ValuAdder comes equipped with an extensive integrated Learning and Information Center that leverages the power of the Java Help system.
This gives you two tools in one – a powerful business valuation analysis tool and a flexible learning system. Whether you are new to business appraisal or a seasoned veteran, ValuAdder adapts to make your task of valuing a business easier and more time efficient.
As computer systems evolve so does Java. We already have full Windows support – on the eve of the release of this new Windows system.
Business valuation tools that capture the spirit of innovation
As you work on a business appraisal using ValuAdder you are benefiting from the talent and dedication of a global community of software engineering professionals that made the Java software possible.
Tools for Business Valuation
