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truedelphi

(32,324 posts)
Wed Jul 30, 2014, 04:01 PM Jul 2014

How does one go about establishing the value of a company?

Let's say that a hypothetical company has $ 125,000 as a gross income, and then after adjustments, it has a $ 50,000 net income.

What is that company worth? Is it worth $ 50,000 or twice that or three times that? (Assuming no large outstanding debts, or lawsuits against it.)

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How does one go about establishing the value of a company? (Original Post) truedelphi Jul 2014 OP
Like everything else Sherman A1 Jul 2014 #1
I agree that it is a subjective calculation with many factors examined. However, I think merrily Jul 2014 #3
Your dialogue with ShermanAi is worth reflecting on. truedelphi Jul 2014 #11
You're welcome. As you said, you will use all responses as food for thought. merrily Jul 2014 #13
It's supposed to be a relatively objective calculation, but I don't merrily Jul 2014 #2
Thank you for that link. truedelphi Jul 2014 #9
You would also have to factor in the value of any tangible assets and good will. Shrike47 Jul 2014 #4
Right you are. I had totally forgotten about the value of tangible assets, truedelphi Jul 2014 #8
In your example, I would say that it is worth merrily Jul 2014 #5
Various posters offering varying ideas does get my brain juices going. truedelphi Jul 2014 #6
Fair enough, as long as you have it all in perspective. merrily Jul 2014 #10
There are a number of ways to value a company and they rely on different metrics. BillZBubb Jul 2014 #7
A multiple of one is very safe but not necessarily accurate. merrily Jul 2014 #12
I pointed that out in the text. You have to account for other factors to improve accuracy. BillZBubb Jul 2014 #14
Perhaps the best starting point if you are trying to buy some or all of the company. merrily Jul 2014 #15
I do NOT start with earnings. Earnings can be fudged. I start with REVENUES. BillZBubb Jul 2014 #16

Sherman A1

(38,958 posts)
1. Like everything else
Wed Jul 30, 2014, 04:19 PM
Jul 2014

it is worth what someone else is willing to pay for it. I am sure there are formulas that will help you establish the valuation, but even with those there are variables which include seasonality of the product or service, goodwill, name recognition and many intangibles.

merrily

(45,251 posts)
3. I agree that it is a subjective calculation with many factors examined. However, I think
Wed Jul 30, 2014, 04:23 PM
Jul 2014

earnings have the most to do with it, or should.

More minor point. If it is a closely held, and smaller business, you also have to back out some of the kinds of compensation to the major stockholder(s) that another employee might not be able to demand successfully.

merrily

(45,251 posts)
2. It's supposed to be a relatively objective calculation, but I don't
Wed Jul 30, 2014, 04:20 PM
Jul 2014

see it as objective. IMO, the choice of what is considered an appropriate multiple is very subjective, but I hasten to add that not many say that flat out.

http://www.investopedia.com/terms/p/price-earningsratio.asp

There is a lot more about valuation of a business on the net.

truedelphi

(32,324 posts)
8. Right you are. I had totally forgotten about the value of tangible assets,
Wed Jul 30, 2014, 05:00 PM
Jul 2014

Until doing a google search.

And this particular business has a whole lot of good will attached.

merrily

(45,251 posts)
5. In your example, I would say that it is worth
Wed Jul 30, 2014, 04:32 PM
Jul 2014

$50K times a multiple. Choosing the appropriate number for a multiple is where most of the complications (and, IMO, most of the subjective stuff) come in. Also, you value differently for different purposes. Liquidation value is different from going concern value is different from insurance value and so on.

And, if you are asking because of a family dispute of some kind, oy is all I can say. I know of family battles over value that went on for over ten years, with each side hiring its own accountant, whose valuation coincidentally favored the side that had hired that accountant, and not being able to agree on the identity of a tie breaking accountant.

I don't think this is the kind of question where posing it vaguely is going to elicit useful answers. The kind of business it is, the size of business it is, the reason a valuation is sought, etc. all affect a half way useful answer. With respect to all my fellow posters, this may not be a situation in which a poster's answer is going to help you much.

truedelphi

(32,324 posts)
6. Various posters offering varying ideas does get my brain juices going.
Wed Jul 30, 2014, 04:59 PM
Jul 2014

And at this point, the more the merrier. I am throwing "spaghetti ideas" against the ceiling until one or two hit. All ideas are taken with the proverbial "grain of salt" so there is that side of it too. (With these metaphors, you might think I am talking about an Italian restaurant as my business. But it is publishing related.)

And no, it is not a family dispute. Simply a need to grow the business.

merrily

(45,251 posts)
10. Fair enough, as long as you have it all in perspective.
Wed Jul 30, 2014, 05:01 PM
Jul 2014

If it's a loan at issue, the lender will value and then discount some.

BillZBubb

(10,650 posts)
7. There are a number of ways to value a company and they rely on different metrics.
Wed Jul 30, 2014, 04:59 PM
Jul 2014

One easy, yet fairly good way is to use the Price/Sales ratio. With the P/S ratio, if you have a company without a lot of assets that is profitable and with a reliable market and not much debt or other liabilities, ONE TIMES SALES (revenues) is a safe, conservative valuation for a company. It can be a bit higher for goodwill, etc.

If sales growth is above the growth of the economy the Price to Sales multiplier goes up accordingly. Unless it is a growth business, a P/S above 2 is too high.

So your valuation using net income isn't too far off.

BillZBubb

(10,650 posts)
14. I pointed that out in the text. You have to account for other factors to improve accuracy.
Wed Jul 30, 2014, 05:11 PM
Jul 2014

But it is a very good starting point.

merrily

(45,251 posts)
15. Perhaps the best starting point if you are trying to buy some or all of the company.
Wed Jul 30, 2014, 05:17 PM
Jul 2014

But maybe not such a good starting point if you are trying to calculate how much you should sell a portion of the company for. Or if you are deciding on the amount of "key man" insurance you should buy, or how much of a loan to request from a bank without seeming either ridiculous or too conservative.

Of course, no matter what, you are going to start with earnings (and saying one times earnings is only another way of saying that).

BillZBubb

(10,650 posts)
16. I do NOT start with earnings. Earnings can be fudged. I start with REVENUES.
Wed Jul 30, 2014, 05:21 PM
Jul 2014

ONE TIMES TOTAL REVENUES. Not one times earnings.

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