Valuation Techniques by Stanford Business School

The article “Valuation Techniques” by “The Graduate School of Business Stanford University” 1999 discusses the crucial skills entrepreneurs must consider when evaluating opportunities. There are three main methods to rate entrepreneurial industries and practices, exemplifying each technique. The three procedures are the Balance Sheet, Income Statement, and Discounted Cash Flow valuations. The article further explains the three techniques and how entrepreneurs use them. Balance sheet valuations are mostly applied in book value, liquidation value, and accustomed book value.

Liquidation value assesses the value of a corporation’s liabilities and assets, assuming the business may be auctioned. Liquidation value comprises cash equivalents, noncash tangible possessions, liabilities, and intangible assets. Income statement valuations capitalize earnings to value opportunities. The income statements that may be substituted for earnings include Profit Before Tax (PFT), Profit After Tax, earnings, depreciation, and amortization. Discounted cash flows equate a business’s value to its future cash flows discounted at rates that reflect how risky a company’s cash flow is. When discounting cash flows, businesses must project cash flow streams, choose discount rates, determine terminal value, and apply discount rates to projected cash flows.

The article further outlines the factors organizations should consider when selecting an evaluation method they should adopt, among supplementary considerations. The article concludes that valuation is an important aspect that ensures the success of entrepreneurs or businesses. The prices buyers pay to obtain opportunities should not be confused with their value. Price relies on the negotiation know-how of the involved parties, sales dynamics, and motivations. Experience and practice play significant roles in polishing a firm’s valuation skills.

References

Valuation techniques. (n.d.). Graduate School of Business Stanford University.