There must be alternative uses for resources other than the business valuation on your desk. Should you consider incremental values, qualitative factors, or toss a coin in secret? Every business valuation proposal teases the mind, switching between bewitching attractions and nagging doubts.

There must be tremendous attractions, otherwise the business valuation papers would not have reached you in the first place! However, spines of uncertainties lie between your present status and the euphoria of the business valuation promises. How do you choose?

The Internal Rate of Return (IRR) is a valuable yardstick for comparing alternate business valuation proposals between which you must allocate funds. It would be naïve to use IRR alone for key investment decisions, but you can hardly optimize capital deployment without taking this parameter in to account.

A project which does not meet your return objectives is unlikely to make up on qualitative or other aspects. You can also use this factor for negotiating, setting a transaction price which would give you the lowest acceptable IRR. It will also act as a reference point for merchant bankers and other people who scout for opportunities on your behalf.

People in favor of a particular project may not like the IRR approach because it can make their biases naked. However, this is all the more reason to make everyone involved in a project submit to the discipline of comparing alternatives on a level playing field.

Opportunity costing as a corporate culture improves decision making, and your team will like it once they get used to the approach. Much of business valuation becomes mechanical through such a system, leaving you free to mull over the strategic considerations at sufficient length.

Filed under: Business Valuation

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