Being a firm in the Midwest, we commonly value heavy manufacturing and industrial-based companies. While we service a wide array of industries in the valuation space, we have noted a growing trend in the region for start-up information technology companies. Therefore, we are often charged with the task of determining values for these fast-paced companies.
We recently completed the valuation of one such high-growth IT company. We were engaged to determine the value of equity of the subject company for various strategic planning considerations. For high-growth companies, there must be careful consideration of the company’s operating structure, revenue sources, profit margins, reliance on key personnel, and projections of future uses and expenditures of cash. Over a series of management meetings, our team of business valuation professionals worked with the company’s management to define the growth strategy, operating structure, and optimal capital structure of the company. Although this may seem like a routine task for most mature companies operating in readily established industries, developing projections that are realistic and consistent with the expectations of a new or developing company can be much more arduous, as well as time consuming.
Since the value of many high-growth emerging companies can be derived from its expected stream of future cash flows, it is important to develop supportable projections that can be relied upon in determining a company’s value. Poorly developed projections and unreasonable assumptions, combined with a lack of synthesis between projections and business strategy often leave company valuation estimates vulnerable to criticism from outside observers. Therefore, it is essential to take the time to build reliable projections in order to obtain a supportable valuation.
Have questions about valuing an information technology company? Post a comment below or contact our Business Valuations Services at 440-449-6800.