If you are considering selling your company, you have likely started to wonder ‘how much is my company worth?’. And, is the valuation process different when determining how to value a small business to sell? The discounted cash flow valuation is still the most common methodology used when determining how to value a business to sell. This holds true for big business, small business and even tech start-ups.
The discounted cash flow valuation model uses core principles of economics and finance, even where the inputs to the model may heavily rely on assumptions. In reading a Buffet essay it was he who likened Aesop’s principle that a bird in the hand is worth two in the bush to one of the earliest business valuation models recorded. He is of course referring to the fact that future cash flows are often subject to a variety of dependencies that may or may not come to fruition. But to work out what the bird in the hand is worth, we must look at all the inputs to the valuation model.
You will often hear of talk of ‘multiples of earnings’ in discussions around how to value a business to sell, which is just a derivation of the discounted cash flow model. A buyer wants to know how long it will take them to recover their investment and what return they expect based on the risk they are taking.
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