Stark Naked Numbers

Simon Cook: Business Valuations 101

Apr 2, 2024

Business valuations expert, Simon Cook, and host Jason Andrew discuss the nuances of valuing businesses, forecasting cash flow, and understanding valuation multiples. They explore the difference between price and value, investment risk, EBITDA impact on valuation, and strategies for maximizing value in acquisitions.

01:13:52

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Simon Cook

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Quick takeaways

Value is based on cash flows and investment risks, price reflects market dynamics.

Estimating future cash flows is crucial for valuing a business accurately.

Cost of capital and multiples play key roles in determining business valuation.

Deep dives

Understanding Value versus Price

Value and price are essential distinctions when considering businesses. Value is intrinsic, based on the cash flows a business generates and the risks associated with them. In comparison, price reflects what people are willing to pay based on market dynamics and expectations. Warren Buffett's distinction between price and value emphasizes this difference, highlighting the importance of future cash flows as a key determinant of value.

Introduction

2min

Navigating Price vs. Value in Business Valuations

12min

Understanding Business Valuation and Investment Risk

22min

Maximizing Value in Business Acquisitions

7min

Exploring Multiple Arbitrage and EBITDA in Business Valuations

4min

Understanding Cash Flow and EBITDA in Business Valuations

20min

Navigating Complex Business Valuations

8min

Back in my corporate finance days, I was knee-deep in valuations and financial due diligence for small businesses. I always joked with my boss at the time that it was the easiest job ever. Just figure out the profit, or what we finance folks call the normalised EBITDA, and then you multiply it by three.

But why three times? Why not two or even ten?

I’m Jason Andrew, and this is Stark Naked Numbers – the podcast that strips down the numbers of business, investing, and wealth creation to help you become a better entrepreneur and investor, and ultimately build your net worth.

In this episode, I'm joined by my good friend and valuation nerd, Simon Cook. Simon’s a chartered accountant, and an expert when it comes to valuing businesses.

Today we're giving you a masterclass in small business valuations. If you're an entrepreneur that's either buying or selling a business, listen up. This may give you a slight edge at the negotiating table.

Links:

Follow Simon Cook on LinkedIn.

Subscribe to Stark Naked Numbers on Apple Podcasts, Spotify, Stitcher or wherever you get your pods.

Want the secrets the other accountants won’t give you? Follow Jason Andrew on LinkedIn.

To learn more about uncovering your financials, unlocking your cash and unleashing your cash, visit starknakednumbers.com.

Show Notes:

(01:52) – The difference between price and value.

(04:00) – How to value a business: forecasting future cash flow and investment risk.

(12:21) – A cautionary tale of WeWorks “tech company” debacle.

(15:20) – Establishing a discount rate or required return.

(17:55) – Investing in private companies and grappling with liquidity.

(22:35) – The pitfalls of relying solely on the multiples model for business valuation.

(47:58) – Applying multiples to EBITDA versus cash flow.

(01:00:02) – Enterprise value versus equity value: What’s the difference?

(01:06:16) - Working capital adjustment in the valuation process

(01:10:23) – Deciding between revenue-based multiples and profit-based metrics

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Stark Naked Numbers

Simon Cook: Business Valuations 101

Episode guests

Podcast summary created with Snipd AI

Quick takeaways

Deep dives

Understanding Value versus Price

Investing based on Future Cash Flows

Cost of Capital and Risk Assessment

Multiple Arbitrage in Business Valuation

Difference Between EBITDA and Cashflow

Understanding Enterprise Value versus Equity Value

Remember Everything You Learn from Podcasts