How can you determine what a small company (or corporation) is worth?

How can you determine what a small company (or corporation) is worth?


When considering purchase of a company, there are many approaches:

1) Discount cash flow method. Work out all the projected free cash flows of the company and then do a dcf on it. The key is not in doing up the model – the key is in your assumptions (as in all models);

2) Multiples – look for a listed company in a similar industry and use a EBITDA multiple to find out an approx value. Check yahoo finance – it is rather good for info finding;

3) Asset valuation method – not as accurate as the above but add up all the assets of the company. Note that the sum may be worth more than each piece if all is functioning together well;

4) Replacement value – check out the market values of all the assets and value that.

5) Net Asset Value – Assets minus liabilities for a really general ballpark figure.

I generally use 1 & 2.
3-5 are just very general guides.

----

3 Responses

1. jason77734 Says:
February 23rd, 2010 at 3:16 pm

no clue
References :


2. northfulton39 Says:
February 23rd, 2010 at 3:36 pm

Two approaches.

1. Value all the assets of the company and pay fair value less any liabilities (loans that will need to be paid off); business owns inventory, a building and some vans valued at $350K but has a bank note of $100K, you buy it all for $250K.

2. Look at the financial statements and calculate Earnings before interest, taxes, depreciation and amortization (EBITDA); price should be anywhere from 3-6X that annual number depending on size of the company, industry and growth projections. If a company generates 100K in EBITDA, price could be anywhere from 300K to 600K.
References :


3. The Professional Says:
February 23rd, 2010 at 4:19 pm

Many approaches:

1) Discount cash flow method. Work out all the projected free cash flows of the company and then do a dcf on it. The key is not in doing up the model – the key is in your assumptions (as in all models);

2) Multiples – look for a listed company in a similar industry and use a EBITDA multiple to find out an approx value. Check yahoo finance – it is rather good for info finding;

3) Asset valuation method – not as accurate as the above but add up all the assets of the company. Note that the sum may be worth more than each piece if all is functioning together well;

4) replacement value – check out the market values of all the assets and value that.

5) Net Asset Value – Assets minus liabilities for a really general ballpark figure.

I generally use 1 & 2.
3-5 are just very general guides.
References :


http://www.songbirdcoffeecompany.com/company-corporation/how-can-you-determine-what-a-small-company-or-corporation-is-worth