26 Dec 14
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?
26 Dec 14
1 edit
Originally posted by sh76For any capital sum you should know the annual return on investment you want.
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?
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.
26 Dec 14
Originally posted by sh76Here's a "simple" model presented:
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?
https://www.grantthornton.com/staticfiles/GTCom/files/GT%20Thinking/Business%20Reporting%20Resource%20Center/the_gartner_business_value_m_139413.pdf
26 Dec 14
2 edits
Originally posted by sh76Well, 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.
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?
29 Dec 14
Originally posted by sh76In 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.
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?
Originally posted by bill718Aside 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.
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.
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.
30 Dec 14
Originally posted by sh76Well, I guess you've answered your own question then...
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.
31 Dec 14
Originally posted by bill718Not exactly.
Well, I guess you've answered your own question then...
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.