Discounted Cash Flow (Intrinsic value)
Cost to Build – This method is typically used to model out what the cost would be to build the same asset base within a business.
Replacement Cost – What is the replacement cost of all the assets owned within a business to replicate it as is today? This is essentially the replacement cost of the tangible assets of the business.
Comparable Companies – This is to identify comparable companies that fit within the same size, industry and capital structure, as a direct comparison to your business. Most of this information is typically derived from public company information and is not always a good direct comparison to a private company in the same industry, for many different varying factors.
Precendent Transactions – Using comparable prior transactions of other companies that have sold or merged in your industry is a good indication of market dynamics for what comparable businesses have sold for. The multiple of earnings or EBITDA is the closest direct comparison to get an idea of what your company may be worth. Things to look out for are; how long ago the transaction occurred and if trends in the market have changed since then, that can affect the valuation multiples in the present.
The main objective of a discounted cash flow valuation is to value the business as a standalone entity, not compared to other companies and it’s ability to deliver free cash flow to the equity holders in the future, discounted to today’s value. Many factors go into determining how the cash flows are discounted and determining a present value of the business. These factors include capital structure, access to capital, the stability of the business, the size of the business, the consistency of histoic cash flows, the management team and other key factors that will factor into the overall risk if someone was to own or acquire 100% of the equity in the business.
If you have any other questions regarding the value of your business, please reach out to us directly with any questions you may have and we would be happy to answer your questions.
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