Valuation of entrepreneurial businesses

Gerrit Brösel · Manfred Jürgen Matschke · Michael Olbrich

23 citations0/0 files storedInternational Journal of Entrepreneurial Venturing

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Financial Reporting and Valuation Research Capital Investment and Risk Analysis Private Equity and Venture Capital

Abstract

“A small business is not a little big business” (Welsh and White, 1981) – this also holds true for valuing small businesses. Such companies act in utmost imperfect markets, are generally unique and the forecast of their future profit is rather difficult. These characteristics impede the use of DCF and real option methods, as well as of multiples. Therefore, this paper presents the functional valuation theory as an alternative approach to valuation. Its partial and general models allow a better adaption to the characteristics of entrepreneurial businesses, especially when these models are combined with a Monte Carlo simulation.

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References

1973The Pricing of Options and Corporate Liabilities 1964CAPITAL ASSET PRICES: A THEORY OF MARKET EQUILIBRIUM UNDER CONDITIONS OF RISK*1958The Cost of Capital, Corporation Finance and the Theory of Investment 1975THE VALUATION OF RISK ASSETS AND THE SELECTION OF RISKY INVESTMENTS IN STOCK PORTFOLIOS AND CAPITAL BUDGETS**This paper is another in a series of interrelated theoretical and statistical studies of corporate financial and investment policies being made under grants from the Rockefeller Foundation, and more recently the Ford Foundation, to the Harvard Business School. The generous support for this work is most gratefully acknowledged. The author is also much indebted to his colleagues Professors Bishop, Christenson, Kahr, Raiffa, and (especially) Schlaifer, for extensive discussion and commentary on an earlier draft of this paper; but responsibility for any errors or imperfections remains strictly his own.[Professor Sharpe's paper, “Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk” (Journal of Finance, September 1964) appeared after this paper was in final form and on its way to the printers. My first section, which parallels the first half of his paper (with corresponding conclusions), sets the algebraic framework for sections II, III and VI, (which have no counterpart in his paper) and for section IV on the equilibrium prices of risk assets, concerning which our results differ significantly for reasons which will be explored elsewhere. Sharpe does not take up the capital budgeting problem developed in section V below.]1979Option pricing: A simplified approach 1963CORPORATE INCOME TAXES AND THE COST OF CAPITAL: A CORRECTION 1966Equilibrium in a Capital Asset Market 1992Valuation: Measuring and managing the value of companies

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