The valuation of a business is a mathematical equation.
Valuation = Profit X Multiple
Most people are trained to understand how to calculate the profit in a firm but few understand how to get a value for the multiplier. In all the business plan I have had to review I have not found a section dedicated for the multiplier.
As a company grows what is profit tends to become more complicated. Ask an accountant to tell you and the answer you get is ‘it depends’
To increase the value of a firm , the firm can focus on increasing the profit, the multiplier or both.
The table below illustrates how a company can increase it value
|2||Staff, Culture||x 2|
|3||System and Product Innovation||x 3|
|4||Products and Product ecosystem||x 6|
|8||Business Model||x 25|
One key here is that Income follows assets and influence. The business rents out business assets and gets paid profit. The biggest asset a business can owe is its business model. The Intellectual Property or Product forms a building block of the business model but with the explosion of knowledge a company’s IP or product can be copied.