BUSINESS VALUATIONS MUST INCLUDE MIRR
What is MIRR? Modified Internal Rate of Return. Whereas the IRR (Internal Rate of Return) will keep calculating positive cash flows at the same rate as the initial IRR, with MIRR we are able to cap the positive cash flows to equal that of the funders rate because it is conceivably possible to invest surplus cash back into your own debt. It is not conceivably possible with IRR to find another business with surplus cash and invest at the exact same Returns. In other words, besides Cash Flow, you must perform NPV (Net Present Value of Future Cash Flow), IRR and MIRR. The first two formulae are great for comparing Business opportunities whereas MIRR will provide you with a true reflection of Returns you will achieve.
HOW TO PERFORM AN ACCURATE BUSINESS VALUATION (at PROPPRO247.COM we have this automated on Web-APP and EXCEL)
Firstly, the price paid must make sense, in that the business should produce Net Returns which exceed the hurdle rate multiple times. The greater the riskiness of the business, the greater MIRR should exceed the funders rate. It is only possible to perform these formulae if you have a detailed Cash Flow. STEP 1. You will have applied a prudent (PE: Ratio) to the NPAT average of the business (PE RATIO is the same as applying a Cap Rate to a Commercial Building). STEP 2. You will also apply a useful or balance sheet value on the Fixed and Current assets that are included. STEP 3. Perform a Cash Flow over a minimum 5 year period on an ungeared and geared basis. STEP 4. Now perform NPV, IRR and MIRR
Now ask yourself, do these results make sense for a buyer and funder?
The NPV must produce a positive amount, or else it is a negative investment. IRR must comfortably exceed the hurdle rate or else it is a negative investment. MIRR must also comfortably exceed the hurdle rate or else it is a negative investment. An educated buyer and funder will have set guidelines as to how many times the MIRR should exceed the hurdle rate according to the riskiness of the industry and business itself. Without MIRR it is not possible to accurately gauge the value of a business and take the guesswork out. Should you need to adjust the value, you would simply adjust the PE RATIO accordingly.
IT IS EASY WITH OUR AUTOMATED SYSTEMS - simply adjust the amount of gearing or any ratio and assess the value in minutes. PROPPRO247.COM have Business Valuations, Development Valuations and CRE Valuations on auto. Web-App and Excel