Definitive Business Plan, Second Edition, The

Putting a price on success

Valuing a business is similar to valuing a project (see Chapter 11 ) only a little more vague. The principle is simple. You buy a business not for today's profit, but for the value of the future stream of income that the business will produce.

For example, if you were generating a profit of $1 million a year and interest rates were 10%, an investor would have to put $10 million in the bank to produce the same flow of income. So a wily backer would happily pay you $10 million – especially since it is expected that your business will grow and the annual return will increase (this is what your business plan promises, isn't it?).

The practice is confused by the fact that everyone's view of the future – and risk – differs. ...