Re: How to value a web site
RAY TAYLOR WROTE:
> Determining the value of a private corporation is very
> different from a public corporation.
> Working out the value of Yahoo is very easy indeed. You only
> have to check the price the shares are being sold at.
>
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A couple further comments related to valuing a private
company
In theory the value of a company is the value of all of its
future cashflows with some kind of discount rate applied.
For example if you have a company that will only exist for 1
year and will make 1 million dollars at the end of that year
the value of the company is
1,000,000/1 + (some expected rate of return)
The rate of return you expect is central to determining the
value of a company. The stock market as a whole has
historically returned around 11%. In the case of an internet
company the future cash flows are more uncertain which means
you should be expecting a rate of return considerably higher
than this 11% average. A rate of say 30% wouldnt strike me
as innaproppriate. If you compare the value of the
theoretical company at 11% vs 30% you would get values of
1,000,000/1.11 = 900,900
and
1,000,000/1.3 = 769,000
respectively
The point being is that you should keep in mind that these
companies are generally very risky and you should expect
substantially higher returns as a result.
The value of liquidity should also be taken into account.
The fact that you can dump shares of yahoo on a moments
notice is definitely worth something. Since you dont have
that option with a private company you should reduce what
you are willing to pay compared to a similar public company.
Finally there is clearly a hype factor priced into public
internet companies right now. Part of this is based on the
idea that some of them will be market leaders in what will
be an enormous industry. Another part is based simply on the
madness of crowds. Just because Amazon is selling at a
zillion times earnings right now doesnt mean that you should
pay a similar premium.
Take all of these factors into account when pricing an
internet company. I wouldnt use yahoo as a base except in
the loosest of senses. Chances are the inflated prices you
are seeing right now won't hold forever so its best to make
a realistic assesment based on what you expect the company
to make and the return you want to get. If the price isnt
right walk away. You will be happier you did.
Brett Rosen
AD 2000 Consulting
Web Development and Maintenance Services
http://www.ad2000consulting.com
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Received on Wed Feb 03 1999 - 11:13:12 CST
