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Small Business Valuation (and Big Business)

Apart from the obvious differences of size and governance - what sets apart small business from big business?

Big Business clearly has a lot more resources to throw around - more revenue, more profits and more capacity to raise funds.

But there are some more fundamental differences that set small business apart from big business:
  • The effective leverage of systems and processes.
  • A market structure that facilitates the buying and selling of shares.
  • The relentless daily comparison of the performance of the business against the value of the company.
We often accuse Big Business of too much focus on the short term share price, but this focus also forces Big Business to continually ask "have we added value to the business?".  

Small business rarely focus on value on such a regular basis. 


Price is what you pay - value is what you get

Warren Buffet invests based on this philosophy - he wants to know the benefits he will receive from investing in a business and whether these benefits outweigh the price.

Business valuation (both small business and big business) is no different - value is based on the net present value of future cash flows.

Sometimes valuation is based on other variables:
  • Asset value
  • Last money invested
  • Past or similar transactions
But when it comes to valuing a business as a going concern, we like to determine value from the future cash flows of the business.

Three key questions in determining the value of cash flow:

1. Scope
What is being valued? What are the relevant cash flows? What conditions will impact the valuation?
2. Quantity
What are the ongoing adjusted earnings that should be capitalised to infer a value?
3. Price
What is the price at which the cash flows are to be capitalised (risk and return)?

Maxell Consulting applies the big business valuation theory and rigor to small business so that you can use this information to:
  • Make better decisions
  • Reduce the risk of your decisions
  • Turn reliable information into valuable actions.

We have systems and experience in:

  • Understanding how the cash flows in your business need to be adjusted to reflect the underlying value.
  • Assessing the attractiveness and risk of a business and how this is reflected in the cost of capital.
  • How to identify the drivers that influence the value of your business.
  • How to develop the business to increase the value of your business.
  • How to communicate the value of your business to a strategic buyer and attract a premium.