Dr. John Psarouthakis, Founder and former CEO, JPIndusries,Inc., a Fortune 500 industrial corporation. Publisher of www.BusinessThinker.com
Before you can begin final negotiations on price, you need to determine the value of the company. You can use several techniques to value a company. We recommend the discounted cash flow value approach as the most accurate method although other approaches are useful in preliminary stages of your search to give you a sense of the range of the estimated price.
Timing and Scope of the Valuation Process
An initial calculation of valuation can be done on a fairly mechanical basis, based on information provided to you by the seller using established formulae and guidelines. However, determining the accuracy of the financial data that the seller provides you is an on-going part of the evaluation process that should take place throughout preliminary and formal due diligence up to the closing. Thus valuation takes place along with negotiations throughout the deal-making process. One of the key objectives of due diligence is to surface any information that might affect the accurate valuation of the company. If your team does not have a financial auditor you should hire one to verify the accuracy of the historical data.
Once you verify the completeness and accuracy of existing documents, historical valuation of a company is often relatively easy from a technical standpoint. But it may be a fairly inaccurate reflection of what you can expect from the firm’s financial performance in the future. Thus, although a preliminary valuation of the company might be done initially when you first receive financial data from the company, refining the financial assumptions about the company’s future performance must take into consideration a wide array of non-financial considerations. Accurate forecasting requires a thorough understanding of general trends as well, trends specific to your industry, the economy, and of course a thorough understanding of the strengths and weaknesses of the particular company you plan to purchase.
By Dr. John Psarouthakis, Executive Editor of www.BusinessThinker.com, Founder and former CEO, JP Industries, Inc., a Fortune 500 industrial corporation
This is the 11th of a Series of 15 short articles on “HOW TO BUY THE RIGHT COMPANY” They will be posted at one a week
In acquiring a company you must determine the value to you and the price you want to pay for the company / business you are considering.
Although four basic approaches, the profitability and multiple (price/earnings ratio)method, the asset method, historic cash flow and discounted cash flow, are all used, the discounted cash flow method is considered the most realistic valuation of the candidate company. However, a comparison of values from different methods can provide useful insights, especially in the early stages of valuation of the business.
Mr. Richard Rush is a Vice President at PNC. He has over 24 years of financial services experience including serving as managing director at Wi Trust; divisional director at Alliance Bernstein; portfolio manager and director of research at Fox Asset Management; and national director of institutional consulting at Prudential Securities. Richard currently serves a Investment Advisor at PNC Wealth Management. He is an invited contributor at The Business Thinker, llc.
Leadership does change. Whether it’s in a car race, in a classroom or even in a country — whoever or whatever leads — eventually changes. That’s history.
In this context, it is easy to understand then, that changes or shifts occur in all things. By virtue of this certainty, and the ability to exploit that change, does it not warrant some important considerations in investing behaviors as well? For example, the premise that there aresignificant and sustained leadership changes in the stock market’s three primary equity capitalization groups called: Large, Medium and Small Capitalization stocks, is a given. That’s also history. Each capitalization group has led the market, and each has trailed the market, in sustained fashion but always in random rotation. Clearly, fertile territory exists within which to exploit this certain but random change. Continue reading