Download - Valuation what does it mean
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Introduction
Business/Product Life Cycle
Definitions
The Phases of Start-ups
How much am I worth?
How are valuations done?
Summary
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High marketing
spending & some profit
Maximum profit & Cash
Low profit & Cash coupled
with high costs
Break-even Or
Loss
Business /Product Life Cycle
Introduction Growth Maturity Decline
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Definitions
• The process of determining the current worth of an asset or company. There are many techniques that can be used to determine value, some are subjective and others are objective. www.Investopedia.com
• Appraising or estimating the worth of something having economic or monetary value. www.businessdictionary.com
• The process of examining various economic factors of a business using predetermined formulas to assess the value of the business or an owner’s interest in a company. Business valuation may be conducted to provide an accurate snapshot of the company’s financial standing to present to current or potential investors. . www.businessdictionary.com
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Phases of Start-up Development
Ideation
Models and proto-
types
Conception
Clear target and
direction
Commitment
Legal entity and able to deliver the
product
Validation
Revenue and market
approval
Growth
Showing a big number of
customers in a growing market
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o Inventory
o Cash
o Buildings
o Equipment
o Copyrights
o Patents
o Trademarks
o Brand Equity
o Unpaid Salaries
o Loans
o Vendor ?
Basic Worth
Tangibles Intangibles Liabilities Value+ - =
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Three important methods
NPVNet Present
Value
IRRInternal Rate of Return
MarketValue
What is the best method?
There is no best method or approach for valuations, your value is what you can earn in the future.
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NPVNet Present
Value
• Is the value of future money calculated today
• 1 JD in five years is worth less today
• This means we have to discount it, so what is the rate of discount?
• The Excel formula is: NPV= (Discount Rate, Cash Flow 1, Cash Flow 2, Cash Flow 3, …….)
• Cash Flow 1 = Profit of year 1 and so on
• This discount rate depends on many factors
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NPVNet Present
Value
Defining the discount rate
NotesRatingDiscount RatePhase
Angel RoundWorst.8Ideation1
.6Conception2
Most deals.4Commitment3
.2Validation4
Best.1Growth5
Discount rates are negotiated based on evaluating a number of factors
A T AFactors Influencing Discount Rate - 1
1 Uniqueness
2 Industry
3
Trends
4
Competitive Positioning
5
Market Share
6
Customer Diversification
7
Profitability
8
Timing
A T AFactors Influencing Discount Rate - 2
9 History of Sales & Profits
10 Product Cycle Point
11
Product Development
12
Strategy for Growth
13
Value of Similar IPs
14
Growth Potential
Pol
Political Risk
Prod
Product Risk
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• The internal rate of return (IRR) or economic rate of return (ERR) is a rate of return used in capital budgeting to measure and compare the profitability of investments.
• The Excel formula for IRR is: IRR = (Investment, Cashflow1, Cashflow2, Cashflow3, …)
• The IRR is best used when comparing investments with similar risk or with similar financial forecasts
IRRInternal Rate of Return
IRRInternal Rate of Return
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• A company’s value is similar to another firm in the same industry, and at the same phase of the business cycle
• Market value is used for the acquisition of mature or well established companies
• To estimate a company’s market value we can use the PE ratio, that is: The value of the company/Earnings
• The PE ratio is called the multiplier
• To obtain the market multiplier one needs to calculate the average PE for the relevant industry or market segment
MarketValue
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Summary
NPVNet Present
Value
IRRInternal Rate of Return
MarketValue
What is the best method?
o NPV for start-upso IRR to compare investmentso Market Value for mature companies