The value of a private company is not just the value of its assets. It's the present value of all future cash flows to be generated by those assets, discounted at an appropriate interest rate. The interest rate is determined by comparing similar companies in similar industries with similar growth rates. Always rely on Experts of Business Valuation to get the right value for your business.
This comparison has become more difficult as many businesses have gone from being publicly traded to being privately held companies. This means that there are fewer comparables available and even if we did have them, they would be outdated since most private companies are growing much faster than public ones.
Why market comparison is challenging in private company valuation
Selling a Business can be challenging, especially when there are differences in the business model, market size and growth rates. Differences in profitability and risk can also make it difficult to compare businesses of different sizes.
Business owners try to minimise taxes
If you want to know the true value of your business, don't use a tax professional, hire a Business Valuation expert. He or she will be tempted to minimise taxes by accelerating them into the current year. Some experts are so bold as to suggest that you not use any of the company's financial statements when valuing a small business.
The best way is to use the company's net cash flow over the next five years.
If you're looking to value a business, there's no better way to do it than by using the company's net cash flow over the next five years. Net cash flow is simply the difference between a company's revenues and its expenses after taxes.
That means it accounts for all transactions that impact profitability, including capital expenditures and non-cash expenses like depreciation or amortisation.
The formula for calculating net cash flow is simple:
Net Cash Flow = Operating Income + Depreciation + Amortization - Change in Working Capital - Capital Expenditure - Other Non-Cash Expenses
Pass through entities are the norm for private companies
One of the most common ways to value a business is by using the net cash flow method. This method uses a combination of balance sheet and income statement figures, which are then discounted back to present value.
The cash flows themselves are usually derived from start-up costs, projected earnings and outflows, and finally, estimated liquidation value.
With all this in mind, let’s examine how you might use pass-through entities as part of your valuation process.
Conclusion
In this article, we’ve explained how to value a business using net cash flow and why you should use it. Consult experts to know the challenges of this Business Valuation method and the steps you can take to overcome them.
By valuing your company using net cash flow over the next five years, you will be able to more accurately determine its value as well as make better decisions about future financing options.
Source - https://www.apsense.com/article/use-the-net-cash-flow-to-get-the-right-business-valuation.html