How much should you pay for a business? Valuing a company (6)

Cash flows

When considering purchasing a company, another way to value the business is to examine what cash it will generate over a period of time.

• This can be in straight cash terms not taking into account inflation, price erosion etc. 
• You may also wish to apply discounted cash flow principles to arrive at a net present value (NPV) for the company, or 
• even an internal rate of return (IRR) on the purchase.
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Perhaps the most useful way to value it is to estimate the economic benefits that the business will generate in the next few years and then apply the NPV process to them. All valuations based on forecast figures are essentially educated guesses, but this analysis is likely to pinpoint the best opportunity for creating value, if the forecasts turn into reality.

Also read:

Valuing a company (1)

Valuing a company using Asset Value (2)

Valuing a company using Multipliers (3)

Valuing a company using Market Capitalisation (4)

Valuing a company using Non-Financial Measures & Balanced Scoreboard (5)

Valuing a company using Cash Flows (6)