|
Internet Business Articles Start online business REPLACEMENT VALUE
The current cost of reproducing the tangible assets of a Start online business can be a significant consideration in that starting a new company may present an alternative means of getting into the Start online business. Sometimes the market value of existing facilities is considerably less than the cost of building a plant and purchasing equivalent equipment from other sources. In most instances, however, this replacement value represents more of a reference point than a serious possibility.
Start online business EARNINGS VALUATIONS
A second common approach to an investor's valuation of a company is to capitalize earnings. This involves multiplying earnings by a capitalization factor or price/earnings (F/E) ratio. This immediately raises two questions: (1J Which Start online business? and (2) What factor?
Start online business EARNINGS FIGURE
There are three basic kinds of Start online business.
Historical Start online business The assumption behind looking at historical earnings is that they can be used to project the company's future performance. However, there is no logical reason to evaluate a company on the basis of past earnings. They can rarely be used directly, and an extrapolation of these figures to obtain a picture of the future must be considered a rough, and frequently poor, approximation. Nonetheless, historical earnings can be a general guide to the future; they provide a concrete supplement to what would otherwise be just a series of best guesses. Some benefit from the financial history of past operations can be gained by studying each of the cost and income components, their interrelations, and their changes over time.
To do so, random and nonrecurring items should be factored out and -an effort made to distinguish normal from extraordinary operating expenses and cash flows. Extraordinary costs or gains—or their absence—may be very important. For example, inordinately low figures for maintenance and repairs over a period of years may mean that extraordinary expenses will be incurred in the future for deferred maintenance. Similarly, nonrecurring windfall sales will distort the normal earnings picture.
In a small, closely held company, particular attention should be paid to the salaries of owner-managers and their family members. If the secularist have been unreasonably high or low for the type and size of the Start online business or me duties performed, paying more normal salaries will result in an adjustment in earnings. An assessment should also be made of depreciation rates to determine their validity and to estimate the need for future earnings adjustments. The emoting of federal and state income taxes paid in the past may also influence future earnings because of carryover and carry back provisions in the tax laws.
Eelier Start online business Under Present Ownership How much and in what ways income and costs are calculated for future operations depends to a large degree on the operating policies and strategies of management. Both present and future owners' approaches will be influenced by management ability, economic and non economic objectives, and so on. In calculating future earnings for a company, these factors must be considered and weighed.
A calculation of value based on future earnings can provide a good indication of the current economic value of the company to the current owner. To an investor, including the present owner, this figure provides an economic basis for continued activity and investment. However, to an Investor who, anticipates a change in management with his investment, an evaluation based on earnings from the current owner's management is no' an adequate assessment of the value of the company.
Future Start online business Under New Ownership These earnings Figures are relevant to someone investing in -the turnaround of a dying company or the reinvigoration of a stagnant one. The basis for the figures—assumptions, relationships between costs and income, and so on—will probably show significant variance from the company's past performance. Plans may call for substantial change in the nature and operation of the Start online business and involve large capital investments beyond the purchase price.
The projected future earnings of the new operation will determine the value of the company to the entrepreneur by influencing the return on investment (ROI). Because these project of uncertainty, it will be helpful to consider high, low, and most likely outcomes for financial performance.
In addition to deciding on whether-to focus on historical or future earnings periods, the entrepreneur will need to decide the issue of "what earnings?"—that is, profit before tax, profit after tax, operating income, or earnings before interest and taxes (EDIT). Most valuations look at earnings after tax (but before extraordinary items). Of course, the most important rule is to be consistent: don't base a multiple on earnings after tax and then apply that multiple to EBIT. Beyond this, it is essential to consider precisely what is being measured in the valuation. A strong argument can be made for using EBFT, which measures the actual earning power and underlying value of the Start online business, free from, the effects of financing. This is a particularly valuable approach if the entrepreneur is contemplating changing the financial structure of the Start online business in the future.
|