Thinking about how your company will be valued by those with big bucks? If you have a public company that is heavy in intangible assets, this 6 paper is a must read! Many factors contribute to the overall value of a small growth company. This analytical overview identifies some of the key issues to understand if and when seeking a valuation of a small company for the purposes of steering the operational ship and making strategy decisions.

Revenues: Tend to give a sense of the cash flow a business can produce (despite the fact that it may have a miserable track record of doing so) in the right hands. Consequently, revenue multiples tend to be useful for businesses that are normal in terms of performance as opposed to “shooting stars”;

Normalized TTM EBITDA: This is the sort of proxy for cash flow that the academics favor. The "A" is important, since technology and other intangible asset based companies tend to take big write-downs when they acquire other companies, which would otherwise depress EBIT. Depreciation or Amortization numbers and historical financials were not significant part of our process because at this stage of their development D&A is nominal if any therefore EBIT is an acceptable proxy for EBITDA.

Growth in Revenues:While growth is a standard feature of models, most people find it odd that the short-term growth in revenues (i.e. the last 12 months) is more important than longer term growth, or earnings growth. The short-term focus is probably not that hard to justify given the recent fickleness of the stock market. The focus on revenues rather than earnings is a little tougher: The explanation is that recurring revenues and the attractive earnings associated with them tend to follow quickly in the footsteps of the lower contribution license and services sales; hence growth in revenues begets growth in earnings / cash flow, which soon gets translated into value.

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