- Useexpectedvalues.Thefuturerevenuesorearnings
usedinthevaluationshouldbeexpectedvaluesand
not best-case estimates. With both distressed and
young companies, we have to consider the
probabilities thatthe firms willnot make itto the
futureyearandwemustreducetheexpectedvalues
accordingly. - Don’tdoublecountgrowth. Thisapproach isoften
used with high-growth companies to obtain future
values.However,analystsoftenuseinflatedmultiples
ofearningsorrevenuestoobtainthefuturevalueand
usethehigh growthpotentialof thecompanyasa
justification. Since the future revenue or earnings
valuealreadyreflectsabigchunkofthehighgrowth,
this leads to double counting of the growth. - Convert into today’s value. Applying a forward
multipletoearningsyieldsafuturevalue,whichhas
to be discounted back to today to allow for
comparisonstotoday’smarketvalues.IntheSirius
valuation,weusedthe11.44percentcostofcapital,
whichreflectsthehighriskwefaceingettingtoyear
5, to discount back the future value.
Venturecapitalistsuseavariantofthisapproach,wherethey
estimateearningsinafutureyearforayoungfirm,andthen
applyanexitmultiple(reflectingtheexpectationofapublic
offeringor saleatthat point)to estimatethefuture value.
Theythendiscountthisvaluebackatahigh targetrate of
return(often 25 to 35 percent)toestimatethevaluetoday,
andjustifythehightarget rateofreturnbypointingto the
high likelihood of failure.
CONCLUSION