Determining the Intrinsic Value of Your Business

Alex Tabatabai is Co-founder of Fernbank Partners (http://www.fernbankpartners.com). During this video he shares some information that will help in determining the intrinsic value of your business.

  1. Intrinsic value: true worth of a company
  2. Calculate assets based on liquidation value
  3. Conservatively calculate future cash discounted to present value
  4. Use intrinsic value when buying or selling business

Transcription

Every business owner and CEO needs to know how to determine the intrinsic value of their business. Intrinsic value of your business is-- what is that is business really worth? Not what other people think it’s worth. Now what a market quotation says it’s worth. What is it really worth? And as the CEO or business owner you’re in a much better position than a business analyst, an outsider or Harvard intelligent people from the financial sector may purport themselves to be and the intrinsic value of the base of the business generally boils down to one of two things. You’re either talking about the assets of that business or it’s future cash flows.

Generally we’re talking about future cash flows. A business’s assets are held and used to generate future cash flows. Now if a business is not efficiently operated. It needs to be liquidated then we look at the asset values.

With regards to future cash flows, this is a very time consuming and can be a very subjective thing to calculate. One needs to think about many things and the future cash flows must be discounted to their present value. And this should not be an exact number. It’s a range because it’s an estimate. You’re taking in to account many different factors and you’re trying to put a rough conservative reasonable estimate together of what this business should be able to earn over the long term, five to ten years plus.

You should know what your business is worth so you can compare it those numbers or in case you’re planning to sell your business. You want to know what your business is worth so you can compare to that to prices that people are offering to pay for your business.

Inversely if you’re going out to make acquisitions, you need to make intrinsic value calculations of those businesses or assets you’re going to purchase and make sure you do not over pay for them.

Every CEO and business owner really needs to understand the intrinsic value of their business and a lot of it is common sense stuff. What are my business assets or what the future cash flows of this business? What do I reasonably expected to earn over let’s say the next 10 years and just take it discounted present value of that and you should have a rough estimate, a range of what the intrinsic value of your business is.

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