Notesale: Turn your study into money

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HULT International Business School
Principles of Entrepreneurship (ENT200) - Midterm Exam Study Guide
Note - For the semester with D
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​Business valuation: the process and set of procedures used to determine what a business is worth
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It makes a bug difference to the business appraisal result if the business is to be sold on
going concern basis rather than being liquidated at an auction
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Going concern:​ the business will continue operating beyond the valuation date
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3 business valuation approaches:
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Asset Approach
Market Approach
Income Approach

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The asset approach is based on the so-called
economic principle of substitution which addresses this question: what will it cost to create another
business like this one that will produce the same economic benefits for its owners ? Since every
operating business has assets and liabilities, a natural way to address this question is to determine
the value of these assets and liabilities
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2
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Premise of value
control
marketability
asset or income based business
going concern

The challenges of this method are to figure out what assets and liabilities to include in the valuation,
choosing a standard of measuring their value and then actually determining what each asset and
liability is worth
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many business balance sheets may not include the most important business
asset such as internally developed products and proprietary ways of doing business
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But
the real value of such assets may be far greater than the all recorded assets combined
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Other times the asset approach can be used is when the business is based
on assets such as an investment vehicle, and not on income, such as a production company
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​The ​market approach relies on the signs from the real marketplace to determine what a business
is worth
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The business price that a willing buyer will pay, and a
willing seller will accept for the business; Both parties are assumed to act in full knowledge of all
relevant facts, and neither being under compulsion to conclude the sale
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​Market
data is great if you need to support your offer or asking the price = the « going rate »
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The three
main methods utilized are:
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Guideline Transaction Method
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The ​Income Approach takes a look at the core reason for running a business: making money
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The income
approach uses 2 ways to do this transaction:
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Discounting
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Advantages:
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widely recognized
flexible in addressing companies of many different stages and natures
simulate a market price even if there is no active market

Disadvantages:
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Relies on hypothetical projections
Utilizes a discount rate with many variables in determining the appropriate figure
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Liquidity: the ability of the firm to pay its way
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Gearing: information on the relationship between the exposure of the business to loans as
opposed to share capital
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Profitability: how effective the firm is at generating profits given sales and or its capital
assets
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Financial: the rate at which the company sells its stock and the efficiency with which it uses
its assets
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The omission of stock gives an indication of the cash the firm has in relation to its liabilities
(what it owes)
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5:1 would suggest the firm has twice as many liabilities as it has cash to pay for
those liabilities
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CURRENT RATIO = CURRENT ASSETS / CURRENT LIABILITIES

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Ideal level: 1
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A ratio of 0
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Too high => might suggest that too much of its assets are tied up to unproductive activities
— too much inventory for example ?
Too low => risk of not being able to pay your way
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Comparison with other forms helps to identify the value placed on
the market of the business
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Related to the return on the investment to the share price
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Different measures of profit => gross and net
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A gross profit margin of 45% means that for every £1 of sales, the firm makes 45p in gross
profit
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Keeping control over fixed costs is important => could be easier to overlook for example the
amount of waste (paper, light, etc)

ROCE = (PROFIT / CE) * 100
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Be aware that there are ≠ interpretations of what CE means
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Partly a measure of efficiency in organization and use of capital
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A high turnover might mean increased efficiency ,
○ But it depends on the type of the business => retails might have a high stock
turnover ratios whereas a luxury shop have a lower one => business model involved
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DEBTOR DAYS = DEBTORS / SALES TURNOVER * 365

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the shorter the better
Gives a measure of how long it takes the business to recover debts
Can be skewed by the degree of credit facility a firm offers

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