Valuation

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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

Item Asset Benchmark
1 Client Base 1
2 Staff, Culture x 2
3 System and Product Innovation x 3
4 Products and Product ecosystem x   6
5 Distribution/Partnership x 10
6 Position/Brand x   15
7 Scale x 20
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.

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