The Physics of Company Value

In my work as a Virtual IT Director, I often think about how companies can improve their value by embracing information technology.

A common way to value is to talk about the annual profits, multiplied by some number (typically between 1 and 5).

Value = Profit x Multiple

There are a wash of business coaches out there who will help you to increase your profit. I’m far more interested in how you can increase your Multiple.

Today I decided to look at this equation in terms of basic units. Value is in £, Profit in £ per unit time (e.g. £ per year), and therefore the unit of Multiple must be time. The simple proof is at the end for those who are interested.

What does this mean, how can a multiple have units of time? Pondering that question in the garden today, I decided it makes perfect sense. If you were going to buy a company for a large number of times it’s annual profits, you’d want to be sure that it could produce those profits (or higher) for a long time.

So, my next goal is to start working out the elements of Multiple, particularly in relation to information technology, and business processes. Answers on a postcard.

Workings of how we get to the units of Multiple (a bit geeky)…

In physics there’s a concept that an equation must have the same fundamental (e.g. SI) units on both sides. For example…

Distance = Speed x Time
[Distance] = [Speed] x [Time] <– [] represent “the fundamental units of”
meters = (meters / seconds) x seconds
meters = meters… and all’s well in the world of maths

I figure we can apply this same logic to our value equation above as follows…

Value = Profit x Multiple
[Value] = [Profit] x [Multiple]
[Multiple] = [Value] / [Profit] <– Simple re-arrangement
[Multiple] = £ / (£/time)
[Multiple] = time

… or in English: “The units of Multiple are time”

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