Wait, what is this you say. Why on earth would I compare the gift of life to a commercial enterprise?
Well, while I agree that life is about so much more than money, for the sake of a different perspective bear with me for a moment and consider what your life’s value would be if it was a business.
Now there are many ways to value a business, revenue multiples, EBIT and EBITDA multiples, P/E multiples, asset valuation, discounted cash flow analysis and the list goes on. Many papers and books are penned on the subject.
For our approach, let us use a P/E multiple combined with Net Tangible Assets.
What is a P/E Multiple?
P/E stands for Price to Earnings. The Earnings part is the profit after tax that a business attains in a year, the Price is the value of the business. P/E is often used to compare stock exchange listed companies. E.g. you might have a company worth 100m that makes 10m a year, the P/E multiple would be 10x. If you are trying to establish a value using a P/E multiple, you decide upon a multiple then apply it to the profit after tax.
What are Net Tangible Assets?
Basically Cash + Assets – Debt.
a P/E multiple combined with Net Tangible Assets?
Without getting too far into the merits of various valuation methods,
What multiple should we choose?
Applying the P/E multiple
To get the P/E multipple we don’t just take annual salary and times it by four. That would be a revenue multiple. Nor do we take earnings after tax and times it by four which would be something like net profit before expenses and taxes. No, to get a multiple we should take the amount you can save per year. This is effectively your profit after tax as a person and the nub of this line of thinking.
|Income p.a||Savings p.a||P/E Valuation at 4x|
|Hypothetical Person 1||200k||20k||80k|
|Hypothetical Person 2||75k||18k||72k|
|Hypothetical Person 3||120k||0k||0k|
Applying the NTA
|Assets||Debt||P/E Valuation||Combined Valuation|
|Hypothetical Person 1||1.4m||1.2m||80k||280k|
|Hypothetical Person 2||250k||0||72k||322k|
|Hypothetical Person 3||600k||680k||0k||-80k|
So what perspective does this open up?