valuation what does it mean

18
A T A 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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A T A

Introduction

Business/Product Life Cycle

Definitions

The Phases of Start-ups

How much am I worth?

How are valuations done?

Summary

A T A

Building Business

Is understanding how to create value to obtain the right…...

A T A

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

A T A

Business Life Cycle

-200

-100

0

100

200

300

400

Year -1 Year 0 Year 1

A T A

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

A T A

HOW MUCH AM I WORTH?

Part I

A T A

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+ - =

A T A

HOW ARE VALUATIONS

DONE?

Part II

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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.

A T A

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

A T A

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

A T A

• 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

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