Discounted cash flows dominate business valuation to a fault. Though the principle is right, there is a tendency to prevaricate when it comes to sticking your neck out on projections. The distant future is always rosier than the present in most business valuation thinking!

The rate at which projections are discounted are more related to present inflation than to uncertainties of the future-they can mislead though the sophistication of analysis and the graphs look good.

Pay back is more tangible and binds people securely. You can influence business valuation by asking for proposals to be reworked so that pay back is brought forward. This is especially the case when you expect a continuing stream of developing investment opportunities. Pay back should also have priority when you are forced to stray far from your home turf, whether geographically or in terms of economic sector.

There are a number of ways in which your business valuation team can restructure cash flows to ensure earliest possible pay back. Staging investments is a great way to do this, and gives incentives to implementing teams to try harder. Another approach to business valuation could be to start with a loose association before ownership changes hands.

Discourage the establishment of large capacities much in advance of demand, merely because economies of scale are involved. Lease rather than invest as far as possible, and outsource non-core services, rather than establish your own permanent infrastructure. Critics may say that you are timid, but why attempt to be a hero with capital?

Filed under: Business Valuation

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