Challenging Factors in Valuing User-Based Companies

Valuing User-based Companies
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February 26, 2023
Valuing user-based companies is challenging due to various factors that need to be considered. Nonetheless, every manager and business executive should be able to generate a measurable and actionable estimate for future growth. Accordingly, as discussed in the article, two of the most significant challenges are corporate drag and intrinsic valuation.
Corporate drag refers to the costs of running a company beyond its core business. For user-based companies, this includes marketing, research and development expenses, and general and administrative costs. These expenses can significantly impact the company's valuation, and it can be challenging to determine the appropriate level of corporate drag to include in the valuation. One example of a company suffering from corporate drag is General Electric (GE), which experienced a significant decline in valuation was primarily due to the company's significant write-downs and restructuring charges, which were related to its struggling power business and other unit in 2018. One plausible solution to this challenge is to use a comparable company analysis. This approach involves looking at similar companies i...