How to value a business

There are many ways to value a company. There is no “right”, although it could probably reach several bad. Ultimately, the company is worth what you think it is worth, on the basis of criteria that you have. But you can make your estimate using several different ways to value a business and choose the combination that reflects its final estimate of value.

You can start by looking at the value of the assets of the company. What is the company? What team? What is the inventory? After all, you have to buy the same things if a tea room starts from scratch, so the company is worth at least the replacement cost. The balance sheet can give you a good indication of the value of company assets. If the company does not have a good set of books, think twice before buying it. You can get badly burned if the current owners do not know exactly whether the company is profitable.

Other methods of assessing all think of a company as cash flow. They appreciate a company trying to find a value for the cash flow.

Income is the approximation of the value of a company. If the company sells $ 100,000 a year, you can think of it as a source of income of $ 100,000. Often companies are valued at a multiple of its turnover. The multiple depends industry. For example, a company may sell usually “double sales” or “after-sales”. If you have a good broker, he or she may be able to help you search multiple typical sale for your industry. A good business broker can also help you if he or she has conducted assessments in the industry being studied.

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But, unfortunately, it does not mean revenue gain. If you are in doubt, just look at There were 2002 sales of nearly $ 4 billion, but profit. In fact, it has not made a profit of a penny from the day it was founded. How much would pay for a more than $ 4 billion per year that you have to pump an additional $ 380 million per year just to stay afloat?

That is why the revenue and why multiple benefits can be a better way of thinking about the evaluation. If a company has earnings of $ 10,000, that money can be used for growth or dividends to you, the shareholder. The estimate of revenues in the coming years and ask how income stream worth to you. Be careful, though. Do not assume that earnings will be stable. Competition, changes in supplier prices and a declining industry may affect the results. Be sure to consider in their projections.

Warren Buffett uses what is called an analysis of discounted cash flows. He looks at the amount of money the company generates every year in the future, then the value of the cash flow stream “updated” long-term using the interest rate of treasury bills is calculated. There is no space to explain the theory or calculation, but can be used in Excel VAN “net present value”.

A quick and dirty method is to divide the current annual income in the long term, the rate of Treasuries. For example, if the store earns $ 10,000 / year Treasuries have returned 3 percent interest, the company is equivalent to treasury bills ($ 10,000 / 3 per cent = $ 333,333 $ 333,333 worth making $ 333,333 invested in bonds Treasury return the same income $ 10,000). So if you have $ 333,333, you could win your $ 10,000 / year by investing in Treasuries with much less effort than running the store. This technique puts an upper limit on its evaluation. After all, why spend more than $ 333,333 in a store where you can earn more by spending the same money in treasury bills? Of course, using this quick and dirty technique assumes that the tea shop will be the same year after year profit, and that only issues of monetary return is assumed.

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These assets assessment techniques, multiple sales, multiple benefits and value analysis, cash flow in the financial aspect of the company. no financial considerations also come into play. You may have to pay more for a tea shop if it is next to a restaurant of his own, as the combined company may have more value. Or maybe you’ve always dreamed of owning a tea shop. Be careful of letting your dreams influence their assessment as well, however. My friend Vinnie has always wanted to own a grocery store hidden. He got his wish, but not a good evaluation. It took years and many headaches to dig his way out of the situation.

I hope these ideas will give you a headstart in the evaluation of the company. I also recommend that you get your banker involved in the evaluation. From your banker will help finance the company, he or she will have a good idea of ??how to make a good assessment of the stores in your area.