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What's it Worth?

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Most company valuations are done by simply estimating today’s value of the cash a business will generate. Businesses derive value from generating more cash than they spend. Red ink won’t cause a business to fail; some companies operate for years without generating a profit. A lack of cash causes them to close the doors. High profit leads directly to a high tax bill. Many business owners would be very excited at the prospect of a strong cash flow with no profit, few would be happy the other way around. As I like to say, only accountants care about profit.

All that is needed is complete knowledge of a business’s future cash generation. Sounds easy enough – as long as you have a trusty crystal ball.

A successful valuation starts by creating a deep understanding of historical results: how a business operated, where it generated its cash and where its cash went. Past performance is not a guarantee of future performance, but it’s one of the best places to start learning.

It is only once we understand a company’s past that we can shape its future. We can compare metrics to industry averages to determine what works and what doesn’t, estimate future growth rates by collecting data on how fast the region, industry or customers grow, and assess how the business has been run to estimate how much risk is involved in future income.

Producing a robust valuation model is really the beginning. Once we have this model, we now know what drives the value of this company. We know what will have a small impact and what will add value.

In a recent meeting after completing a valuation model for one of my clients, several company representatives were arguing about one particular facet of revenue generation. Once they began raising their voices, I quickly interjected and asked for the lowest and highest possible range for this facet. I used the valuation model I had built to demonstrate the point of their argument had almost no impact on the company. Not only was it not worth arguing about; it wasn’t even worth using time to discuss.

A successful valuation model lets businesses concentrate time and energy on areas that are important to the success of the company. I have generated valuation models for a wide variety of companies and assets. ExxonMobil has used my valuation models to facilitate decisions on major investments and identify operating efficiencies. My valuation models guide managers and owners to areas that have a meaningful impact on cash and allow them to quickly compare themselves to competitors in those areas. It will make clear what a business is doing right. Once we know what is being done right, we can think about how to systemize those areas so that managers and owners can focus elsewhere.

We will also identify what is being done wrong. Critical areas that aren’t right need laser-like focus until they are corrected.

A company valuation can be required for many reasons, not all positive. A successful valuation model can be expensive, but will easily more than pay for itself if it’s used to generate the insights it can provide. At Ulku Logistics we have been generating intricate valuation models for years, but rarely because we care what the asset is worth. We generate valuation models to help improve assets, to decide on a path forward for assets, to guide in major multi-billion dollar decisions. You can hire a lot of people to value your company. You should hire someone who can use a valuation model to generate valuable insights and improve your company.


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