Discounted Cash Flow
Discounted cash flow is a complicated method that projects future earnings. It is used to estimate the future cash flows of your company, excluding capital expenditures and increases in working capital, or the money needed to run the business.
Feldman prefers this method for companies that have historically been profitable, citing academic research that indicates it is the most valuable method for determining the worth of a company. A financial analyst or account should be used to determine future earnings.
Tips Before Conducting a Business Valuation
Value is relative. Just as your business is unique, so too is its structure and value: Your cash flow may be strong, but your earnings may be below industry average. Or perhaps you have valuable intangible assets, such as a loyal customer base or patents. The process can be subjective and influenced by factors that a seller can't control, such as industry forecasts and the economy.
Get started early. You will want to conduct a business valuation years before a sale, particularly if you want to increase earnings or cash flow in order to raise the asking price. You'll need to show the last three years of financial statements to a prospective buyer, so valuing your company four or five years prior to a sale is a good strategy if you want to increase its value prior to eventual sale.
Do your homework. Because business valuations are often complicated and different methods are preferred in different industries, it's best to research valuations thoroughly and employ financial advisers – particularly business valuation specialists – before proceeding with a sale. To find an appraiser, check with other small business owners, including competitors who may want to buy your business or the American Society of Appraisers.
