Mr D while congratulating ValuePickr on where it has in the last 4 years, was quick to point out that there is more to come. In his words
"The best is yet to come…estimating the value of a business to a 100% owner/takeover valuation. This exercise will be useful to hold on to extraordinary, seemingly richly valued businesses …KNOWING THESE CAN BE UP FOR SALE.
Even if they are NOT FOR SALE, their intangible assets need to be valued properly. We might not be accurate but we can certainly estimate how desperate a new owner would be to acquire.
Concepts of Intellectual Property, Brand and Pricing Power, Network Effect - as barriers to entry and thus building blocks for disproportionate future growth - HAVE to be incorporated in Valuation.
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I have been trying to get my feet wet on the subject for months now. I feel totally inadequate to tackle the subject, let alone put an introductory/influencing piece up, for discussion.
However given the confusion I have witnessed (especially in the last 6 months) in several stellar minds, I make bold to push through some of my yet unformed thoughts to kick-start this very important discussion piece.
Its important to bring everyone on the same page - if we are to have more & more insightful discussion, so here goes.
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What makes for the most valuable business?
Most folks I have seen are confusing huge SIZE OF OPPORTUNITY, coupled with Integrity of Management and Efficiency of Management - as THE defining factors.
While these are no doubt important, and if you can find a business with these characteristics early on, it will sure make for great returns, perhaps even extra-ordinary returns, if you hold on to the business for a number of years.
However, the moment we put on the shoes of a 100% acquirer of the business, a shift in perspective is bound to occur.If you have some ~6000 Crs and want to buy the most valuable of the VP Portfolio businesses, which one are you likely to go after??
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IT’s obviously NOT in the NUMBERS/RATIOS - else Mayur Uniquoters would have been the most valuable
IT’s my case that its NOT even in the SIZE OF OPPORTUNITY - else Astral Poly Technik would have been the most valuable
IT’s also NOT the best Economic Profit Added or FUTURE VALUE CREATION - else Ajanta Pharma might have been the most valuable
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Its my case that financial factors and the above more tangible aspects of the business provide only a part of the Value Estimateto the 100% Buyer of the business. It is the **Intangible Assets **in the business(in addition to above) that determine the Real Value to the Buyers.
Most times it is an evaluation of how much would it cost to re-create an existing intangible asset based on the original cost of creating it - that plays a decisive role.
Intangible Assets could include Brands and Pricing Power, Intellectual Property, Proprietary products, Customer loyalty and concentration, Trade secrets and Process know-how, skilled employees and skilled management team, strong distribution network. Intangible Assets could also include strategic benefits to a specific buyer and the cost of doing it alone!
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That’s as far as my thoughts go on the subject
Looking for help from seniors and fellow-learners to take this important discussion forward. And more specifically to applying these to current and future VP Portfolio candidates - and estimate their value to a 100% buyer of the business - as Mr D would want us to.