4.01 Influences on the value of an enterprise

The word “enterprise” refers to a core, distinct business operation, which may or may not be incorporated. The distinction between an enterprise and a company, is that the enterprise refers only to the core operations. The company may include certain other assets that the enterprise does not use in the generation of income. The enterprise’s core operations may be funded by both the shareholders and / or the lenders.

Simplistically, the value of an enterprise can be reduced to a single equation:

Value = Opportunity / Risk

The opportunity in a business can be expressed in various ways – revenues, profits, cashflows, potentially even capital gains.

The risk in an enterprise is usually quantified – following analysis – and expressed as a cost of capital, a capitalization rate, a discount rate, or a multiple.

Refer to 6.1 Influences on the value of an enterprise – earnings, which deals with the “top-line” of the above equation (opportunity).

Refer to 6.2 Influences on the value of an enterprise – risks which deals with the risks.