As a rule of thumb i heard the value price should be 3.5 x the annual net profit of any business,
Sadly that idea of some rule of thumb does not hold out for even one example in the real world. The real value can be hidden in any one of dozens of factors, IP, real estate, missed opportunities, key skills of certain staff.
And it ain't just small companies that hide assets, liabilities or missed opportunities. Giant corporations with a market cap of billions, can, in reality be total basket cases to be avoided at all costs!
In 1999, Polaroid was worth billions, if we just look at the market cap when its share price went bonkers on the back of the massive sales of the cheaper instant cameras. Within two years the company had a minus value, because management was stupid enough to sell off all its rights and research into digital photography.
Hidden from outside eyes, they gave away their future for pennies, because they could not see how to make a profit from digital - they only understood the economics of the Gillette razor and the Inkjet.
In around 2012 Facebook launched its IPO and was deemed worth well over $100 billion. That was a geek-service with no profits. Investors were not looking at the profits, they were looking at the potential.
Potential can go the other way. In 2002, a little-known company called Avid that made video and audio hardware, interfaces and render cards that allowed low-powered PCs and Macs to render and edit video and even edit films, was pottering along at $10-$13 a share. Then it launched a series of very successful hi-definition cards for both audio and video and the share price shot up to over $60.
The one thing management and investors completely missed was (1) Moore's Law, that computer speeds and capacity doubles every two years. And (2) the truism that software, when not updated and expanded vigorously, loses its value totally in about ten years.
Instead of spending their new-found wealth on R&D, they went on a mad-cap round of M&As of all sorts of media creation companies, spending a total of about $1.2 billion! Nearly all those acquisitions had to be sold off in a fire-sale for under $100m and they had to borrow against all their IP assets a further $200m just to keep afloat.
Because expensive R&D staff in the USA had to be fired to cut costs, the software stagnated and other manufacturers caught up and even overtook the once market-leader. The share price fell to $4.74 in overnight trading last night and the reality is, the company is still trading, but the net value is probably roughly zero.
I can think of one company that has one employee, the owner, and a hand-full of freelancers helping out, that must be worth at least in the mid-nine-figures. The owner came up with one very, very simple idea - why write a programme that crunches numbers? Why not write a programme that merely calculates the commands and leave the number-crunching up to the OS and the internal native drivers? That way, one tiny programme can wrangle terabytes of data instantly, whereas all the others require huge gobs of hardware and still take ages to do anything.
