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  1. Standard member 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. Standard member 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. Subscriber 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:

    https://www.grantthornton.com/staticfiles/GTCom/files/GT%20Thinking/Business%20Reporting%20Resource%20Center/the_gartner_business_value_m_139413.pdf
  4. Standard member 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. Standard member 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. Standard member sh76
    Civis Americanus Sum
    28 Dec '14 03:02
    Originally posted by no1marauder
    Here's a "simple" model presented:

    https://www.grantthornton.com/staticfiles/GTCom/files/GT%20Thinking/Business%20Reporting%20Resource%20Center/the_gartner_business_value_m_139413.pdf
    Thanks, no1.
  7. Standard member 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. Standard member 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. Standard member 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.
    Well, I guess you've answered your own question then...
  10. Standard member sh76
    Civis Americanus Sum
    31 Dec '14 15:37
    Originally posted by bill718
    Well, I guess you've answered your own question then...
    Not exactly.

    What I eventually settled on was the present value of the company's average annual earnings over the past three years over the next 10 years assuming the company's projected growth rate plus the fair market value of the company's inventory.

    Not perfect, but as a general proxy, it will do.
  11. Standard member sh76
    Civis Americanus Sum
    31 Dec '14 19:15 / 1 edit
    double post