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
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- owners of intellectual property give away too great a share of the new venture in exchange for capital investment
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- new ventures fail because they are not well enough funded.
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