Ask a consultant

  • Updated: September 2, 2007 - 4:35 PM

Q Besides revenue, gross profit and net profit, what are some other soft factors that weigh in when evaluating the worth of your company?

PETE SAARI

DiscBurn

A The two most important factors in valuing a business are cash flow and risk.

Because of various accounting rules, the recorded profit of a business might not be the same as cash flow. A quick approximation of cash flow can be found by taking your recorded net income after taxes, adding back the level of depreciation expense claimed and subtracting the investment in short- and long-term assets you made in that year.

In some years, you may find your cash flow is negative when your accountant says you made a profit. Other years, your cash flow might be much greater than your profit.

To assess the risk, look at the competitive environment. Are there many other businesses that do the same thing? Is your product or service going to be technologically irrelevant in the near future? Are there potential legal or tax judgments outstanding? Is your product or service heavily dependent upon the economy and are economic conditions looking favorable? This is the same analysis that an investor would use to value any investment -- stocks, bonds, mutual funds, etc. -- and it is likewise relevant to the value of an ongoing business.

DAVID VANG, PH.D.

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