SOCIAL MEDIA COMPANY VALUATIONS: WHAT IS YOUR COMPANY WORTH?

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Boston, Massachusetts, United States of America (Free-Press-Release.com) June 13, 2011 --

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SOCIAL MEDIA COMPANY VALUATIONS: WHAT IS YOUR COMPANY WORTH?

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Valuations of Social Media Companies are going crazy. Facebook is looking at an IPO with a value of $100 billion (or 50 times revenue), which would shoot them into the top 30 Fortune 500 most valuable companies; more valuable than Merck, Goldman Sachs, and Apple. Linkedin is trading at a value of $6.9 billion (34 times revenues and about 460 times earnings) and Twitter’s last series B private financing valued it at $7.7 billion (51 times revenue). Great valuations if you own the stock, but are they really worth this or is this just a repeat of the dotcom bubble of 10 years ago? Certainly the multiples being used would suggest an overvaluation, so buyers beware!

So just how are private companies valued, and how can you value your own company?

Method 1. Comparative Value

A typical and quick method to value your company is to compare yourself to companies in similar market sectors, of similar size, that are valued either by the public markets or through private financings. One can then look at valuation as a multiple of revenues or earnings and use the average multiple from several companies to apply to your revenues or earnings. As we see from the examples above, social media companies like Facebook, Twitter and Linkedin are valued at 30-50 times their revenues.

The drawbacks of this method are that no two companies are the same; the products are probably different, the market segment may be different, the demographics of the customers may be different, the stage of the company’s evolution are probably different, and the management team is different, all of which could result in a very different company with a very different outlook.

Method 2. Discounted Cash Flow

This method estimates the present value of future free cash flows of the company. One has to be able to construct a financial model of how the company will evolve, forecasting sales, costs, equipment needed, staff levels, investments and other factors so that one can calculate how much cash the company will have in the future. Free cash flow is essentially the cash you are left with after paying out for the products or services you create. Free cash flow is equal to your earnings – tax + depreciation – change in working capital (current assets – current liabilities) – capital expenditures. Free cash flow is also equal to your operating cash flow minus capital expenditures. By applying a discount value one can calculate a present value of the cash flows, and a value of the company.

The drawbacks of this method are in the assumptions made regarding the future revenues of the company, the costs involved and the appropriate risks level assumed relating to product acceptance, competitive activity and other industry and economic risks.

Method 3. Net Asset Value
This method essentially assumes all the assets of the company are sold off, all creditors are paid, and what is left is the value of the company. This method does not take into account the future potential of the company and therefore is used more as a baseline value estimate.

Method 4. Private Financing Valuations
This method is the closest thing to a public market valuation. Many private companies talk about the post-money valuation of their company after their last round of private financing, and it is true those investing in the company established this value. However, depending on the investors, the company’s value could vary substantially in a public setting and may be biased by the private investor’s personal interest in the company’s future success.

Valuing Social Media Company’s, which are only just starting to figure out their business models and how they might make money, is not easy. The excitement and enthusiasm behind some of the initial IPOs is understandable for this new wave industry, but we should be careful to remember the trends of the past with new technology industries and how valuations became over inflated only to collapse and assume valuations more in line with other companies.

MP Consulting writes a weekly blog on Social Media, Marketing, Business Strategy and other Key Business Topics. I hope you enjoyed this blog and that you will send me your comments and subscribe and link to my blog at http://mpconsulting.worpress.com. There are lots of free guides and presentations available at my site, and if you need help, or need to ask me a question, then fill out the comment section on my blog or send me an email.

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MP Consulting Services specializes in the areas of strategic planning, marketing and social media. Mark Philip, principal at MPCS, has over 20 years experience in managing businesses, both small and large, has orchestrated multiple turnarounds, built product pipelines, launched new products, sold companies and created significant shareholder value. Let me know how I can help you with your business challenge

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