A large number of academic books and articles have been written about business and company valuation. Despite the extensive factual resources available, the topic always provokes strong emotions and differing opinions among stakeholders. Instead of emotions, using logic and facts is preferable in valuation.

Valuing a company with predictable cash flow is straightforward. In contrast, valuing technology companies is extremely challenging. The earlier the stage, the more guesses are relied upon instead of facts. In such cases, a whiteboard is often more useful than an Excel spreadsheet.

Technology companies are very diverse and do not fit into a single mold. Attempts are made to categorize and value companies using the same methods based on the company's type, profitability, growth, market conditions, etc. This can lead to problems when the buyer's and seller's views do not align.

Commonly used methods for valuing technology companies include:

• Revenue multiples (EV / Sales)
• EBITDA multiples (EV / EBITDA)
• Multiples from comparable acquisitions
• Discounted Cash Flow (DCF), which is the present value of future cash flows
• Opportunity cost, which is the cost of creating a similar product or service

It's easy to stumble with the analysis of discounted future cash flows, especially with DCF. The outcome depends on future cash flows and several other difficult-to-define parameters. Since some parameters need to be predicted, and predicting is notoriously "easy," the result is often worthless.

The value of a company with intangible assets cannot be precisely determined. At best, using multiple valuation methods will yield a price range. If the range is too wide, the estimate of the company's value is useless. Different buyers have different motivations that affect valuation. A company with small revenue might fetch a high price at the peak of Gartner's hype cycle, while later in the cycle, profitability and growth might determine its value.

For valuation, it's also important to understand other factors that affect value, such as the buyer's strategic objectives. Opportunity cost can significantly impact the company's price tag—either positively or negatively.

The value of a company is what a buyer is willing to pay for it.

By Vesa Walldén