Mike Stoke & Assoc. Pty Ltd

Brisbane, Australia

Mobile: +61 (405) 115-669

Email: mike@stokeconsulting.com


Why focus on Value?

Many important business decisions are made by gut-feel ... but that level of risk isn't needed.  Value can be estimated well enough in almost all circumstances to make it an essential tool for decision-making.

Well-founded estimates of value enable a meaningful comparison of each of several alternatives under consideration, enabling an informed choice to be made that can considerably reduce the risk involved in a new venture.

While gut-feel can be an important factor in identifying alternatives, the best decision for your organisation and your shareholders will be the one that adds the most value.

The value of a business is often estimated using industry standard P/E ratios and recent financial performance statements.  This approach undervalues businesses that have growth opportunities in the near future - but value is estimated this way because based it on the future is often thought too difficult or unreliable.

The result is often that:

  • owners wishing to exit achieve a sale price well below true value
  • owners of intellectual property give away too great a share of the new venture in exchange for capital investment
  • new ventures fail because they are not well enough funded.
What is involved in estimating business or venture value?

In practice, value is readily derived from estimates of future cash flows.  The process involves:

  • the development of a realistic business strategy, based on realistic analyses of market dynamics and other risks
  • valuation based on future cash flows as projected by the business model, using a realistic assessment of the risks involved
  • the use of an interactive business model to test alternative scenarios of the future and allow sensitivity analysis of the risks involved
  • documentation presenting the rationale behind the risk parameters used for valuation (which will support negotiation in relation to value).

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