Business free cash flow valuation method « Selling a business

Business free cash flow valuation method « Selling a business

August 3rd, 2010 . Posted in business valuationNo Comments »
Tags: business, method, valuation

Free Cash Flow business valuation method is widely accepted method of evaluation, including the assessment of an ongoing concern for the '. The flow method is based on the measurement of business opportunities for the future and its projected cash. Both are essential for investors and shareholders.

The formula

NetFreeCash flow = SUM (FC i / (1 + r) + RVN / (1 + r) n + ADJ)

Where:

FC = free cash flow in the year

n = forecastYears

r = Discount rate

RV = residual value in year n

ADJ = Adjustments: surplus assets minus liabilities

Operational steps

Step 1

Enter the discount rate. This rate bonds is based on the risk of interest rate, free market (eg government), with a risk premium to the market, the company grew as much as the company's risk is involved, or as much as the uncertainty of its products and markets.
If you do not knowwith choosing the right discount rate, you should use the asset interest rate 12-15% for low risk and 25-40% for high risk business.

Professionals use the weighted average cost of capital (WACC) is calculated using the formula:

WACC = Debt / Equity * (1-T) * CD + equity / assets * CE

Where:

T = marginal tax rate

CD = cost of debt (the average interest rate on debts)

Market Risk EC = risk free rate + (Beta *Premium)

Beta = risk factor for the economy than the industry average in its risk. A beta-versa, that less than 1 means that the vice-business is less risky than comparable companies in its field e.

Step 2

Enter the factor price / earnings. The factor should be consulted, selected according to price / earnings average factor of public companies that belong to the same industry and your business. These data can be recovered every day fromfinancial part in almost all newspapers.

Step 3

Enter the amount of surplus assets (assets, business operations can not sell his injury and present) and the amount of the value of debt (short and long term debts that the company should).

Step 4

Profile of the company's value in three ways residual value. These methods are described below.
Note the value is based on its cumulative cash flow is calculated discount period,has with the present value of remaining assets and surplus value less liabilities.

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