BHVC develops comprehensive business valuations, performed for new and existing businesses for the purposes of selling the business or determining the value of equity participation. A number of widely accepted valuation methodologies are used, with a weighted-average valuation determining a final value.
This approach is similar to how an appraiser values a residential or commercial building. They take several approaches to value and then weight each method based on its applicability.
Here are some of the methods we use:
Discounted Cash Flow – This is the most common method of valuation and it takes the Free Cash Flow of the company over time, and discounts those cash flows back in time to arrive a a present value for that stream of future cash flows.
Industry Comparables – If you’re in an industry that has a significant number of sales transactions, it can be beneficial to compare those transactions to yours, much like an appraiser uses comparable sales on real estate to assist in arriving at a value for the subject property.
Revenue Multiples – Again, this tends to be industry specific, and depends on how much revenue the company brings in per year. You will over hear the expression “X time revenue” where X is a multiple such as 2 or 3. So a company with $2 million in revenues with a 2X multiple might be valued at $4 million.
Net Income Multiple – This is similar to the revenue multiple about, but uses the company’s profitability as a yardstick for value. This will often be expressed as “X times earnings” where X is a multiple such as 7 or 8. So a company with $400,000 in net profits might be valued at $3.2 million.
Customer Multiples – This type of valuation is often used when a company can clearly show its value based upon its list of customers. For instance if a company sells customers subscriptions to a website, and that company charges $10 per month and has 100,000 customers, then a valuation might be based specifically on the number of active customers at the time of closing.
These valuation methods will be combined and weighted to come up with a comprehensive valuation number that can be easily defended. Having such a report can clearly help you in negotiating with an investor or in discussions of selling your company.