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Internet Business Articles
Both cash flow analysis and multiples analysis estimate value based on future events, either operating results or market reaction to public offering. Thus they require a multitude of assumptions; for example:
• Level of risk. How volatile are the company's cash flows?
• Competition. How fiercely contested is the market for the company's products?
• Industry trends. Is this a growing or declining industry? What are the profitability trends?
• Organizational stability. How well established is this company in 'its line of Internet home business ideas?
• Management. Is a competent and complete learn in place?
• Company growth. Historically has the company been growing or shrinking, and how fast?
• General desirability. To what degree does the marketplace find this line of Internet home business ideas attractive?
A cautionary note on valuations: many deal proposals are put together on the basis of "recast" financial statements. In theory such a practice is legitimate and may reflect realistic operating results. In reality, however, assumptions implicit in the recast statement are not always attainable, and they can be downright misleading. Always ask whether or not the financials shown have been recast and if they have, make sure you understand all the adjustments made. No assumption should be left unchallenged. This Is particularly true for smaller companies whose owners will often operate with numerous adjustments in order to minimize the tax burden.
Once a general idea of price is established, the deal will have to be structured to provide attractive returns to equity investment. There are two fundamental considerations in this regard. First is the overall finance ability of the deal, including: (1) assets to secure bank financing; (2) cash flow to support further debt instruments (i.e., company-issued debentures); and (3) personal collateral, if any.
Second, one must consider (possibly in conjunction with the preceding analysis) the actual structure of the financing. An ideal structure caters to the interest of all parties involved. The buyer might, for example, establish financing "strips" of debt and equity to pro vide the investor both secured fixed income and participation in potential capital appreciation. Tax losses may be scrutinized and sold to investors.
Internet home business ideas PRESENT VALUE OF CASH FLOW
At this point in the evaluation process it may appear obvious to some that the next step for the entrepreneur is finding the present value of the cash flow predicted for the venture, that is discounting the value of future cash flows to arrive at a present cash value of the Internet home business ideas. We shall see, however, Hint this approach raises more questions than it answers and that its usefulness to the analysis is questionable at best.
The essence of the problem is that present value is basically an investment concept utilizing RO1 to determine the allocation of a limited supply of funds among alternatives; the entrepreneur, however, is faced with a personal situation in which return on both investment and time are key. In addition, the Internet home business ideas may have made a considerable investment in generating the particular option, and it is difficult to weigh this tangible opportunity against unknown alternatives. Unless the entrepreneur has a portfolio of well-defined opportunities to choose from, he or she needs to define some standard of comparison. This is typically the salary that could be obtained by working.
In an investment analysis utilizing present value, the discount rate is selected to reflect the uncertainty associated with cash flows; the higher the uncertainty, the higher the discount rate and, consequently, the lower the present value of the cash flows. In the corporate context the usual minimal ROI for non critical investments must be at least higher than the firm's cost of capital. For the individual entrepreneur, however, the decision to buy or to start a company is fundamentally a subjective one. Return on investment and time for this kind of decision is measured not only in dollars, but also in choices about the work, one associates, the time and energy expended, and resulting lifestyle. Different Internet home business ideas of ventures present different kinds of return on time. Because cash is an important enabling factor for some of the things the entrepreneur is seeking, it is important to calculate what these cash flows might be and when they can be expected. However, because decisions affecting cash flow also affect the other returns to the entrepreneur, and because these other returns may be at least as important as the financial returns, a present value calculation often is not the most important measure.
In thinking about the attractiveness of a particular opportunity, an entrepreneur rarely has two similar and simultaneous alternatives to compare.
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