The Adjusted Present Value

 

Various valuation methods exist for valuing an online business. In the knowledge base you will find among others the 'intrinsic value', the 'improved profitability' and the 'discounted cash flow'. On this page we explain the 4th commonly used method: the Adjusted Present Value.  

Discounted cash flow & Adjusted present value

One problem with the Discounted Cash Flow is that this method does not take into account the changing financing structure. The DCF method discounts future free cash flows at a constant average cost for the total assets of an online store. In practice, however, the capital structure at most SMEs is variable. Loans are taken out and repaid, and in the process the debt capital fluctuates relatively sharply at SMEs compared to larger companies. This changes the equity/debt capital ratio and thus the average cost of total capital.

The Adjusted Present Value (APV) can be seen as an extension of the Discounted Cash Flow, with the difference that the APV does take into account the changing debt/equity ratios.

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Adjusted present value

The calculation of the online business value, according to the APV, has two parts. As with the DCF, the value of the operating activities is calculated. Then (and here is the difference with the DCF) the value of the tax benefit, associated with financing with interest-bearing debt, is calculated. This is the so-called "taxshield". 

Taxshield

When valuing operations, the Adjusted Present Value assumes 100% equity financing (i.e., no debt). The cash flows are obtained in the same way as in the DCF method and then discounted at the cost of equity 'unlevered'. The taxshield valuation consists mainly of the tax benefit on interest payments. This is because interest is tax deductible and the deductibility of interest increases the value of the business.

Depending on the risk profile of the online business, a discount rate for the taxshield is determined. This is usually between the cost of debt capital and the cost of 100% equity.

Advantages of the Adjusted Present Value

With the use of the APV, it is easier to understand where the value of the company comes from. In addition, the APV can clearly show the effects of tax benefits of co-financing with debt. In other words, the effects of a changing financing structure are better taken into account.

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