Business valuation and enterprise value

From: alexhormozi

To achieve an enterprise value of $100million,itisnotnecessarytoinventhighlycomplexproductslikeavacuumcleanerthatconnectstoaphonewithacamera<aclass="yt-timestamp"data-t="00:00:05">[00:00:05]</a>.Whileaimingfor$100 billion would require creating something on the scale of the next Google, an enterprise value of $100 million is potentially achievable for “any business” [00:00:15].

Calculating Enterprise Value

The process of business valuation often begins by defining the target enterprise value [00:00:25]. This value is derived by working backward from a target profit, considering net margins and industry multiples [00:00:49].

Example: House Cleaning Business

Consider a house cleaning business aiming for a $100 million enterprise value:

• Customer Lifetime Value (LTV): Based on industry statistics, an average customer might stay for 2 years and pay $400 per month [00:00:28].
• Industry Net Margins: The industry average for net margins is typically around 20% [00:00:37].
• Target Profit: To achieve a $100million[[wealt{h}_{a}lchem{y}_{a}n{d}_{b}usines{s}_{v}aluation|businessvaluation]],thebusinesswouldneedtogenerateapproximately$12 million to $15millioninprofit.Tobeconservative,orduetolowerindustrymultiples,atargetprofitof$20 million might be aimed for [00:00:40].
• Required Revenue: If the target profit is $20millionandthe[[revenu{e}_{a}n{d}_{p}rofi{t}_{c}alculations|netmargin]]is20$100 million in total revenue [00:00:52].
  • This translates to roughly $8.3 million per month [00:00:56].
  • Or approximately $2 million per week [00:00:57].
  • Further broken down, this means about $300,000 per day in revenue [00:01:01].

Deriving Business Models

This method of “backing in sales velocity” from daily revenue targets and customer lifetime value is a common approach to deriving business models [00:01:05]. The general process involves:

1. Determining the required daily sales [00:01:13].
2. Understanding the worth of each customer (LTV) [00:01:15].
3. Calculating the total revenue that will be generated [00:01:17].
4. Identifying the margin on that revenue [00:01:19].
5. Applying the appropriate multiple to that margin to determine the business’s enterprise value [00:01:21].