Determining the Value of Online Businesses
Value is different for everyone. A business valuation is no different. For example, a fan will pay more money for a concert ticket than someone who is not a fan. Value is thus a subjective concept. Although there are several “objective” valuation methods that can be used to determine online business value, the outcome remains subjective because there always is the element of the valuer choosing a method and having an opinion.
The essence of value (business valuation) is in the online business itself and not in the used method of valuation. But of course, we have to calculate to get to a company value. There are several methods for obtaining an online business valuation. And not all those methods are equally thorough.
For starters: A buyer acquires an online business to earn money in the future. And only if that’s more than he pays for it, he creates ‘value’. This is essential.
Value is made when future earnings exceed the cost of the invested capital.
Business Valuation Methods
Make sure you choose the accurate method when you valuate an online business. Rules of thumb, such as 3x net profit or 1x revenue give an initial estimate but do have a large error margin. This also applies to methods that only take into consideration accounting figures from the past, such as the Intrinsic Value method. These methods completely ignore future earnings!
The best methods (also) take the future into consideration. Examples of these methods are the commonly used Discounted Cash Flow (DCF) and the Adjusted Present Value (APV) methods. And in exceptional cases, the Excess Earnings (EVA) method or the Real Options method (when there is a lot uncertainty).
But each method must be applied with wisdom and knowledge by the “valuer”.
Value is not Equal to Price
The value of an online business is calculated based on arguments. The price is the result of negotiation, with the calculated value often being used. However, long-term value is not the only thing that matters when determining acquisition prices. There are more factors that play a major role. To make this clear, we quote valuation specialist mr. S. Offringa with the following formula:
Acquisition Price = Value x Buyer Experience x Negotiating Position x Financing Options Buyer x Terms of Service x Taxation
1 – Value: To be calculated according to the mentioned methods.
2- Buyer perception: Can be influenced by a good presentation of the company with a clear sales document and clear reports.
3- Negotiation position: Improves by having alternatives. Remove the pressure to sell/buy, because eagerness is expensive.
4 – Financing: A buyer must not only want to have a business for a certain price, but should also be able to finance the acquisition. The seller can have a role in this.
5 – Terms of the deal: The bargaining chip in the negotiations, but at the same time, is sometimes extremely important.
6 – Taxation: An important factor. It has a big impact on the net price that the seller receives for his company. But buyers also benefit from a good fiscal structure.
The above formula illustrates that the value of a valuation should not be “overvalued”. There are many more matters of importance. Another important message is that all of the points mentioned, can be influenced and that you can create value. It’s essential that you start in time!
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