Protoscopic

Nothing worth doing is easy.

As if the process were not complicated enough, the final thing you need to take into account are the intangibles of the strategies you are comparing. For example, most of us are much happier to work from home in our pajamas than in an office for the same pay. Also we’d rather be able to do our work whenever we want instead of on a strict 9-5 time schedule. These are intangible benefits of the passive income stream.

Transversely, we also like a good bit of stability in our lives, which we probably feel is an advantage of a “real job.” Your pursuit of a passive income stream does not have to preclude your day job, but if it does, this is probably a detriment in the intangible column.

All of these intangibles have differing values to different people, and those values are usually based on how highly each person values the self-employed lifestyle. Assuming you are seeking the entrepreneurial lifestyle, several other intangibles should be considered when evaluating the value of a passive income stream.

Maintenance Effort

While your effort is already discounted when calculating your income, it is still fair to say that you’d probably rather have the venture that requires less of your work. If a venture has a lower multiple, but requires drastically fewer hours of your time, you may still prefer the lower multiple.

Learning

If the process of developing the stream also helps you learn or perfect a skill that will help you in future ventures, this is a clear advantage over one that does not. So if you are creating a “site template” that can be reproduced, you would logically expect to spend more time developing the first site than future sites.

Synergy

Similarly, if the work you do to develop this stream could be used for other streams, it can justify taking on a venture with a lower valuation. For example, if you are developing a site that can be used to promote one of your other ventures, it may be more valuable than its multiple would indicate.

Other Demands

Clearly a lower stress venture or one that is not as time sensitive is more desirable. If you are frequently “on call” or facing daunting deadlines, this may negatively affect your valuation of a venture.

Passive Income Stream Valuation Methodology Summary

In the final analysis, valuating the “worthiness” of a venture is as much an art as a science. You must develop income projections, arrive at an appropriate multiple, and adjust for intangible costs and benefits. All of these processes are highly subjective, and your ability to make reasonable estimates will be a skill you should develop over time. As you become more and more capable of making these estimates, you will find yourself more and more likely to only take on projects that have good risk-reward ratios.