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One consideration is just because they don't have any income now, doesn't mean they won't have any income in the future (think tech startups, etc).
I'd guess they were looking for some sort of DCF related thinking that it's about all of the future cash flows, not just this year or historic info, but hard to say without more context
Yeah it was tough. The question was straight up "What is the value of a business with zero income" answer in 10 words or less.
Not saying its the right answer, but I'd answer either:
What someone is willing to pay for it
At least the value of its net assets
Once again, not saying its OK, it's just what immediately came to my mind after reading this
This:
… and you still have two words leftEditor not working. Edit: Probably got MS from Masa Son.
It is insane to watch rounds closing at valuations way beyond wildest dreams (not business plans or market sizes/shares). Call it premium of any sort (including ego or whatever). It is an important trait and humbling experience to be able to step aside, sticking to ones (lower) valuation, and let the bigger bucks flow. While it may be a failed investment/purchase price, and in hindsight overvalued, at that particular moment, it is the price settled.
perfect according to me I might add goodwill
Depends on the reason it has no income. In the case of Amazon the value is $1.2 trillion. For some businesses, it may have a negative value. For startups it could be very valuable. Depends on the reasons causing zero income (no revenues, high costs, high capex by choice, etc).
My first thought as well - founded in 1994 and didn't turn a profit until 2003. Would love to know how many big investors passed on it over those years...
Greater of its discounted future cash flows or market value of assets
Masayoshi Son has entered the chat
The answer is that the firm's value is the the pv of future nonzero cashflow. Hence, the valuations of many unprofitable tech companies.
let’s not pretend anyone uses DCFs to value tech startups. that guy who said “what someone else is willing to pay for it” has the best succinct answer. there are infinitely many variables that the interviewers question doesn’t address and so that is the best answer. in reality valuation of operating businesses are a function of risk and growth - that’s all. you can also go the other way and look at hard assets and liquidation value. biz could have zero income but an easily liquid-able NAV of $10bn who knows.
well isn't something always only worth what someone is willing to pay for it? can't it always be that simple?
in 10 words or less, that’s the only acceptable answer. and yes it is a tautology of sorts, but you would not believe how many people won’t come up with that answer.
.
Do you truly mean income or revenue?
You'll get different answers from different peopel. For me it's zero; no cash flow = no value. If you have bunch of hard assets you might get liquidation value for that.
no net income does not mean no cash flow
Sure... you add back the D&A, stock-based compensation, etc. to get some positive cash flows (maybe) when you have negative income. From a business perspective, no or negative NI is pretty bad and I got MSed for saying that cuz that's not "banking" accounting lol
Income and Cash Flow are two different things.
Amazon has very little income as a result of accelerated depreciation but generates a lot of cash. In fact, most PE-owned companies generate very little / no income (and in all likeli-hood generates a loss) but generates positive levered or unlevered cash flow.
The value of a business at the end of the day is the present value of all of its discounted unlevered free cash flows.
This.
PM me details, I have secured funding
5 words: Value = The Potential For Future Income
The answer is the business is worth the PV of it future cashflows. It's that simple.
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