With every new meeting I get more impressed with Turkish entrepreneurs’ grasp of the valuation concepts. I assume this is due to the widely available material on the web.
One notion they do not seem to think about, however, is the return an investor will require from any cash outlay.
If a pencil is worth TL1, I, with the investor hat on, will not pay 1TL for it…
While this might have to do with my idolizing of Scrooge McDuck at an early age (…), it actually has its roots in my ‘quest’ for a return. I need to put my money where I will get a profit, so I can satisfy my investors and feed myself. The return I might seek tends to differ between a company and a BK whopper, yet it is still the same concept:
I need to profit from the trade, which can only happen if the return I get at the exit (OK – stop thinking about the whopper here…) exceeds the one I can get on a similar investment with comparable risk characteristics.
And how do you calculate the return an investor will get at the point of exit. I like the clear explanation in Wikipedia, so please take a look there:
And what kind of an IRR do I have in mind when I invest? Now, that will be the topic of a later post.