Friday, May 27, 2011

More on Valuations

Right after writing about the basics of valuing a business, I read another piece on valuations that make a great follow up. This piece is about the mistake of establishing a company's value based upon its revenue stream. Revenue is NOT income, folks. I'm always amazed with how many people make that mistake. Revenue is what you take in from your sales. Income (or earnings) is what's left after all your expenses have been taken out. *Cash flow is something altogether different and will be tackled later.)

Don't let the mathematical formula and charts scare you. Bill Gurley, a Silicon Valley venture capitalist and former Wall Street analyst, has written a readable piece about Price/Revenue valuations. His blog posting explores the dangers of looking at revenue streams in a vacuum. "All Revenue Is Not Created Equal" is a good piece because it gets into the difference between sustainable revenue that can feed real profits and create true equity value vs. the crude measures used by people caught up in the hype. The article talks about the inputs to the revenue and how the company is really going to make money. He tells you the questions to ask, such as "What are their margins?" When companies are starting out and growing, margins change and forecasting expenses and capital expenditures can be very fuzzy.

That's why Gurley tells people to beware and to think analytically. Price/Revenue ratios can be as low as 4X and as high at 100X. So when you're looking at hot investments, or if you're looking for people to give you capital for your own business, think critically about the sort of multiple of revenue or earnings or EBITDA your business really deserves. Don't rely on hype. Do your homework.

Thursday, May 26, 2011

50 Fascinating Factoids About Our Aging Population

Did you know that our life expectancy is increasing at an increasing rate? Recently, a follower of this blog sent me a link to their site: Masters in Health Care and to a blog posting of their own: 50 Fascinating Aging Facts for Older Americans Month. Some of the facts, like the one above, are mind boggling, some a bit worrisome.

Valuing Your Business

What is your business worth? How much of your business should you give away when negotiating with investors?

These are two of the most commonly asked questions by entrepreneurs. While most valuations in start-ups are pretty much a function of negotiation with potential investors, there are still some good rules for determining a company's worth. The one you choose to use depends a great deal upon the circumstances and the age of your business, as well as the purpose of the calculation. Are you going to a bank to borrow money? Are you looking for equity investors? Are you looking to sell your business?

American Express has posted a short piece on valuation. It's worth reading, as it explains the most common methods: book value, discounted cash flow, publicly traded comparables, and transaction comparables. 

Monday, May 23, 2011

Behind Your Website

I just finished doing the copy for two websites: one a nonprofit, the other a company being started by seasoned entrepreneurs. In both cases, it paid to step back and ask basic questions before starting the actual writing and design of the site architecture.

Here are the basic questions you need to ask yourself before doing your own site:

What is the purpose of the site?
Who is the target audience?
What do I want them to do after visiting the site?
What information is the visitor likely to be seeking?
What do I want to tell them?
How do I want the visitor to contact us?
Have I made it easy to contact us and to navigate from one place to another on the site?

I know all this may be pretty basic, but in our rush to get things done, we often forget to ask these important questions.

Here's the nonprofit site: