#### Debates Forum

1.  sh76
Civis Americanus Sum
26 Dec '14 20:51 / 1 edit
I'm looking for an algorithm that anyone can use to provide a very basic estimate of the value of a privately held company. It can be based on earnings, assets, age, IP, inventory, whatever.

I realize there's nothing that's going to be precise. But does anyone (perhaps with a business background) know of any specific algorithm that is accepted as a legitimate way to roughly ballpark the value of a business?
2.  finnegan
GENS UNA SUMUS
26 Dec '14 22:15 / 1 edit
Originally posted by sh76
I'm looking for an algorithm that anyone can use to provide a very basic estimate of the value of a privately held company. It can be based on earnings, assets, age, IP, inventory, whatever.

I realize there's nothing that's going to be precise. But does anyone (perhaps with a business background) know of any specific algorithm that is accepted as a legitimate way to roughly ballpark the value of a business?
For any capital sum you should know the annual return on investment you want.

If you can estimate the annual net income generated by a business, then you can calculate the capital sum that would deliver that same income as a ROI.

Alternatively,some people focus on how many years it takes to earn back their investment. A reasonable number of years might be a function of the type of business. It may be that you are not confident beyond a given horizon.
3.  no1marauder
It's Nice to Be Nice
26 Dec '14 22:18
Originally posted by sh76
I'm looking for an algorithm that anyone can use to provide a very basic estimate of the value of a privately held company. It can be based on earnings, assets, age, IP, inventory, whatever.

I realize there's nothing that's going to be precise. But does anyone (perhaps with a business background) know of any specific algorithm that is accepted as a legitimate way to roughly ballpark the value of a business?
Here's a "simple" model presented:

4.  Lundos
Back to basics
26 Dec '14 22:21 / 2 edits
Originally posted by sh76
I'm looking for an algorithm that anyone can use to provide a very basic estimate of the value of a privately held company. It can be based on earnings, assets, age, IP, inventory, whatever.

I realize there's nothing that's going to be precise. But does anyone (perhaps with a business background) know of any specific algorithm that is accepted as a legitimate way to roughly ballpark the value of a business?
Well, you can use the P/E model. Its mostly used as a sanity check and shouldn't stand alone, but its a basic model for evaluating the value of a company.
5.  Lundos
Back to basics
26 Dec '14 23:35
Originally posted by Lundos
Well, you can use the P/E model. Its mostly used as a sanity check and shouldn't stand alone, but its a basic model for evaluating the value of a company.
Privately held company.
Nevermind.
6.  sh76
Civis Americanus Sum
28 Dec '14 03:02
Originally posted by no1marauder
Here's a "simple" model presented:

Thanks, no1.
7.  bill718
Enigma
29 Dec '14 13:48
Originally posted by sh76
I'm looking for an algorithm that anyone can use to provide a very basic estimate of the value of a privately held company. It can be based on earnings, assets, age, IP, inventory, whatever.

I realize there's nothing that's going to be precise. But does anyone (perhaps with a business background) know of any specific algorithm that is accepted as a legitimate way to roughly ballpark the value of a business?
In my opinion no. Algorithms are handy tools for many fields, but the best way of determining the value of any business is the old school methods of either assets minus liabilities, or in the case of publicly traded companies the total value of all the company stock minus liabilities.
8.  sh76
Civis Americanus Sum
29 Dec '14 17:08 / 2 edits
Originally posted by bill718
In my opinion no. Algorithms are handy tools for many fields, but the best way of determining the value of any business is the old school methods of either assets minus liabilities, or in the case of publicly traded companies the total value of all the company stock minus liabilities.
Aside from the fact that what you described is an algorithm (a simple one, but still an algorithm), your opinion does not really answer the question.

First, "assets" like goodwill and potential of intellectual property held by the business may be impossible to measure and value. So, calling those things "assets" just kicks the can until you define "assets."

Second, in the case of public companies, liabilities is presumably factored into the stock price. Total market capitalization is certainly a valid way to price publicly traded companies. But privately held businesses do not have readily available stock price.
9.  bill718
Enigma
30 Dec '14 17:33
Originally posted by sh76
Aside from the fact that what you described is an algorithm (a simple one, but still an algorithm), your opinion does not really answer the question.

First, "assets" like goodwill and potential of intellectual property held by the business may be impossible to measure and value. So, calling those things "assets" just kicks the can until you define "assets." ...[text shortened]... licly traded companies. But privately held businesses do not have readily available stock price.
10.  sh76
Civis Americanus Sum
31 Dec '14 15:37
Originally posted by bill718