Start Up Blog

2 schools of business valuation

Posted in entrepreneurship by Steve Sammartino on October 10, 2009

A favourite game of entrepreneurs, especially in the technology industry is discussing whether companies are worth the price they are bought out for. $1.5 billion  for Youtube ………. Sales prices with infinite price earnings multiples (because there are no earnings, or they are loss making). Versus a company being sold for a few times it’s annual earnings with a long period of earnings history.

A more relevant discussion would be which school of business valuation was used during the transaction, and there are two:

1. Sale price representing believed potential

2. Sale price representing return on investment reality

Which is more valid? Well it depends on which side of the equation you are residing. I’d say when selling, we should be aiming for potential. When buying we should go with reality. When buying a business the simplest question to ask ourselves is this:

On current earnings, how many years will it take me to get back my original investment.

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There’s no doubt certain industries are more likely to sell using the potential valuation method. Burgeoning industries like the internet, IPO’s and even railways 200 years ago are good examples. To get away with selling on ‘potential’ the industry needs to be growing, the future unknown and your company well known. If your startup ever gets enough traction to sell to an incumbent, then take what you can get – sell on potential.

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Web Business Valuation 101

Posted in entrepreneurship by Steve Sammartino on September 28, 2009

A great spoof by the crew at 37 Signals which really says it all:

Here’s the start of the blog entry to whet your appetite:

CHICAGO—September 24, 2009—37signals is now a $100 billion dollar company, according to a group of investors who have agreed to purchase 0.000000001% of the company in exchange for $1…..

….In order to increase the value of the company, 37signals has decided to stop generating revenues. “When it comes to valuation, making money is a real obstacle. Our profitability has been a real drag on our valuation,” said Mr. Fried. “Once you have profits, it’s impossible to just make stuff up. That’s why we’re switching to a ‘freeconomics’ model. We’ll give away everything for free and let the market speculate about how much money we could make if we wanted to make money. That way, the sky’s the limit!”….

I strongly suggest you click here and read it all.

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