Valuation
Valuation answers the question “what is this worth?” --- not what it costs, not what someone paid, but what the expected future cash flows justify as a present value.
What is it?
Valuation is the process of determining the economic value of a business, an asset, or an investment. It is the capstone of business finance because it integrates everything below it: financial-statements provide the data, time-value-of-money provides the discounting framework, margin reveals the profitability structure, and capital-structure determines the cost of capital.1
There are three fundamental approaches:
1. Discounted Cash Flow (DCF)
The purest method. Estimate the future cash flows a business will generate, then discount each one back to the present using an appropriate rate.
Value = Σ (Future cash flow / (1 + discount rate)^year)
If a business is expected to generate CHF 100K/year for 10 years and the discount rate is 8%, the value is approximately CHF 671K. This is theoretical rigour: value equals the present value of all future cash flows. The challenge is that future cash flows are uncertain, and small changes in assumptions produce large changes in value.
2. Comparable multiples
The pragmatic method. Find similar businesses that have been valued (sold, listed, funded) and apply their multiples to your metrics.
| Multiple | Formula | Common use |
|---|---|---|
| Price/Revenue | Market value / Annual revenue | Early-stage, high-growth |
| Price/Earnings | Market value / Net profit | Mature, profitable |
| EV/EBITDA | Enterprise value / Operating profit + depreciation | Most versatile |
If comparable SaaS companies trade at 8× revenue and your SaaS generates CHF 200K/year, the implied value is CHF 1.6M. Simple, market-grounded, but only as accurate as the comparables are truly comparable.
3. Asset-based
Value = net assets (total assets minus total liabilities). Useful for asset-heavy businesses (real estate, manufacturing) or liquidation scenarios. Less useful for businesses whose value is primarily intangible (software, brands, expertise).
In plain terms
Valuation is an educated estimate, not a precise number. It combines financial data, assumptions about the future, and market context. Three methods exist because no single method captures the full picture. The best valuations triangulate.
How does it work?
What drives valuation
Five factors dominate:
- Revenue growth rate --- faster growth = higher value
- Margin profile --- higher margins = more cash retained = higher value
- Predictability --- recurring revenue is valued higher than volatile revenue
- Capital efficiency --- less capital required per franc of revenue = higher value
- Risk --- lower perceived risk = lower discount rate = higher value
This is why a subscription software business with 80% margins and 30% growth is valued at 15-20× revenue, while a consulting firm with 20% margins and 5% growth is valued at 1-2× revenue. The five drivers explain virtually all of the difference.
Valuing your own ventures
You do not need to formally value your businesses. But the mental model is useful:
- CoLab IA has community value (intangible), event revenue (transaction model), and potential recurring revenue (if it evolves to subscriptions). Current valuation is low because revenue is small and non-recurring. But the community asset compounds.
- Training programmes have high per-unit revenue but are time-bound and non-recurring. Valuation is based on your capacity × margin.
- A digital platform (if built) would be valued on recurring subscribers × margin × a growth multiple. The same content, structured as a subscription, is worth structurally more than as one-time delivery.
Understanding valuation drivers helps you design ventures that are not just profitable but valuable --- meaning they could be sold, invested in, or scaled.
Check your understanding
Five questions (click to expand)
- Explain the DCF method in one paragraph. What are its strengths and weaknesses?
- Calculate the approximate value of a business generating CHF 50K/year net profit if comparable businesses sell at 5× earnings.
- Compare the three valuation methods. When is each most appropriate?
- Connect the five valuation drivers to revenue-model and margin. How does switching from consulting to subscription change each driver?
- Apply the valuation framework to a venture you are considering. What are the key assumptions and which one matters most?
Where this concept fits
Where this concept fits
graph TD FS[Financial Statements] --> VA[Valuation] TVM[Time Value of Money] --> VA MG[Margin] --> VA CS2[Capital Structure] --> VA VA --> FC[Forms of Capital] VA --> ID[Innovation and Disruption] style VA fill:#4a9ede,color:#fff
Sources
Footnotes
-
Damodaran, A. (2012). Investment Valuation: Tools and Techniques for Determining the Value of Any Asset (3rd edition). New York: Wiley. The definitive reference. Also: Damodaran’s free NYU Stern lecture series on YouTube. ↩