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.
The value is the worth of the company as will be operated by you (the buyer). The price is the amount you wish to pay for it. The synergy you can realize from the sale, the motivation of the seller, and the projected growth of the industry, and the type of financing are just a few of the factors you might consider in negotiating the final price.
Reference: “How to Acquire the Right Business”
by John Psarouthakis and Lorraine Uhlaner