This is how besides the IT and telecom industries, a specialised company evaluation method, user cashflow-based evaluation built on users, has gained popularity in other sectors as well.
In order to determine the fair market value of a company, company evaluation, which is typically performed at the request of the company owner or an investor, attempts to identify factors, the value of which can realistically be established. In addition to classic company evaluation methodologies*, there are special approaches as well, which sometimes better represent the value and advantages that may be realised by external parties.
One of these specialised approaches is the so-called user cashflow-based methodology. This company evaluation method falls into the category of income cash flow models. However, from a methodological point of view, it estimates the future value of not the company as a whole but that of the individual subscribers and users of specific products and services. It approaches the current company value from the side of user or subscriber numbers.
Where can user-based company evaluation be used?
This approach is used primarily for determining the fair market value of companies operating in the software industry or engaged in website operation or event organisation.
The user-based company evaluation method differentiates between two types of cash flow based on user characteristics:
- the value of users with periodically (monthly, quarterly, yearly) renewing subscriptions, and
- recently joined, paying users.
The expected development of the number of renewing, paying users can be simulated using probability models, typically empirical models, while the annual cancellation rate is one of the indicators of renewal efficiency.
In the case of website access figures, the daily average visitor number can be converted into user activity with the help of conversion rates. There are various benchmarks (DKT, semrush, similar web, other international databases) available for estimating website access figures but individual company data can also be incorporated into the evaluation.
The expenses of obtaining new users (marketing campaigns, discounts, etc.) also represent an important factor in addition to the valuation of renewing, paying users who return each year. During the modeling process, the additional costs of obtaining a new paying user have to be kept in mind, as well as how the product and service portfolio has to be shaped in accordance with the needs of a growing core userbase.
User cashflows are typically necessary to be estimated over a period of at least 3-5 years in order to obtain reliable results.
Depending on operational risk, future cash flows need to be discounted, this is how we can finally obtain the fair market value of a paying user. Therefore, from the point of view of company evaluation, the classic company evaluation methodology can be complemented with an approach typical of the sector in question. The preparation of such evaluations requires extensive and accurate additional data; however, the results might be essential for supporting transactional price negotiations.
This methodology based on user cash flow can help decision-makers in determining the capital value of the target company be evaluated as accurately as possible, primarily in the software, website operation, and event organisation sectors.
*Classic company evaluation approaches typically refer to the following methodologies:
- Future discounted cash flow-based model (DCF, discounted cash flow-based model)
- The comparative method based on historical value-drivers using the multipliers of closed transactions (EV/EBITDA, EV/Revenue, etc.)
- Net asset-based evaluation, an estimate of the fair market value of the relevant assets and thus the determination of the fair market value of equity