When looking at the value of a company going several years out, it could help to have two different perspectives.

Present value and future value.

Some people might relate more to one than to the other. The present value equates it in today’s terms and gives you a sense on what the value of the company would be now based up on the expected future activity. This would be a combination of both the present value of the future cash flows generated by the company, plus the value of the company at the endpoint you are looking at for the valuation, such as say going five years out to 2011. There’s no hard and fast rule to how far to go out, but you should go out far enough to be able to capture some of the essence of the company activity. Some drivers might be how long it takes to develop products and how long of a relationship do you have with particular customers. Another factor could be are there any particular major activities coming up that would not be captured if you used a shorter timeframe.

On the other hand, future value can be meaningful to other people as well. It can also give a perspective in terms of how you expect the company to grow in value year over year. You can see where some of the pockets of more significant value increase would take place. It could show the impact, such as new product launches coming up in the next few years or new service offerings during that time or major new markets open or major customers landed.

The future value can also be sort of meaningful ‘cause it gives somebody a glimpse in their future. For some people, they’ll get it better that well the company will be worth $85 million five years from now, as opposed to a present value of say $25 million for the same company.

Another value from doing the exercise both ways is that it can help give you some feel for what is driving some of the future value and it could help influence some of your short-term decisions. For example, I had one client that was considering making some shifts in their product development area that might’ve helped short-term results. However, when we matched it up against the long-term valuation, we saw that that could have some dramatic impact on the future valuation. When we brought that back to the present, we saw whatever short-term benefit there might’ve been gained would’ve been more than offset by reduction in the present value of the company based up on a reduction in the future value if they invested less in product development.

So consider looking at both present value and future value when you’re doing the valuation of the company and present it both ways. It is likely one way or the other will click with your potential investors, board, management team or whoever else is part of the audience.

Jon Paul, MBA, CPA, CMC, CM&AA

President, Value Added Finance Resources
Bringing new insights on results and maximizing company value