Flashcards in How to Value a Business Deck (11)
Debt + equity
Add together the value of a business' equity ( capital, assets etc.) then subtract the value of its liabilities (debt).
Discounted Cash Flow (DCF)
- DCF analysis can be used to value a company or project. complex calculations are used to estimate the returns (cash) that would be received over time as a result of purchasing the target business. The figure is 'discounted' or 'adjusted' to take into account the changing value of money over time. The sum of all future cash flows ( in and out ) is known as the net present value (NPV). This can help to project the potential value a proposed investment could generate.
Return On Capital Employed (ROCE)
Investors may take into account any financial returns previously received by investors ( for example the size of dividends paid out or the growth rate of share prices) in addition to further projections of investors returns.
An investor could consider the additional value a target company could bring to their existing business.
Does the target business complement their existing business in a manner that could increase the overall value of the newly combined company post-combination?
Could a merger help an investor to reduce costs ( through enabling greater economies of scale or boosting their bargaining power with suppliers); acquire complementary skill sets and expertise; reduce competition; or increase their overall influence in the market? if so, an investor may be willing to pay a premium in order to acquire another business.
Investors could consider whether the target business has formed political, social or commercial relationships that could be beneficial. Take into account the value of human capital. For instance, does the business have a unique management team that affords it a competitive advantage
Comparable Analysis / Precedent Transactions
Investors would likely also take into account the prices that have been paid for similar businesses under similar circumstances.
Earnings Before Interest, Tax, Depreciation & Amortisation (EBITDA) Multiple
For instance, if Company B's enterprise value is £1 million and its EBITDA is £100,000, its EBITDA multiple would be 10. If company A's EBITDA is £50,000 this would then be multiplied by 10 to give an estimated enterprise value of £500,000.
Refers to the decrease in value of tangible (physical) assets over time. An older asset has been regularly used is going to be wroth less than a newer version of the same asset, as it is more likely to break or work with reduced efficiency.
refers (in this context) to the decrease in value of intangible assets over time. For example, a patent may decrease in value as its expiry date approaches.
Future Potential of the Business
Investors could consider the overall prospects of the market in which a business operates and whether any opportunities are likely to arise that will boost profitability.
In addition, Investors could consider where a target business' products are at in the product life cycle. Do the products have the potential to sell at a similar rate to that which has generated current profitability levels, or will sales likely diminish?