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History forms a very good foundation in evaluating and valuing a business. However, young companies have little or no history; many have only one or two years of data available on operations and financing (Audretsch & Link, 2012). This unavailability of data further compounds the valuation of a start up since data forms the major building block of any business valuation.
The amount of data accumulated from the start-up business dictates the ease with which the business can be valued. This means that the duration that a start-up has taken is very important in assessing its value. If a business has existed for quite long it becomes easy to value it as opposed to shortly existed business.
Nonetheless, there are a number of alternative approaches that can be used in valuing a start-up business depending on the business in question. Selection of the approach is based on the nature of the business and the market. One of such approach is valuing cash flow from existing businesses.
In this approach the cash flow of already established business is evaluated. This will help know the expected return of the business and payback time of the business (Schell & Tyson, 2012). The cash flows of any business is examined using its present, future values and interests.
Various ways of measuring cash flows are employed in order to analyze financial instruments like loans, bonds, and dividends. These ways of measuring cash flows are Internal Rate of Return, Net Present Value, Annuities and Perpetuities. They are called time value of money techniques.
Perpetuities-These are annuities which last forever under assumption. This means that when valuing company the dividend is considered as a perpetuity. These cash flows grow uniformly throughout the time.
Net Present Value- this involves evaluating unequal cash flows, both positive and negative. A time value of money technique can be used in this case to generate the present value of future cash flows. This
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