 Re: how to value a business for sale
According financial management theory to valuate business you should:
1. Project cash that this business will bring to owner for very long period (in theory even in perpetuity)
2. Find out appropriate discount rate. Basically that is expected interest rate for similar kind of investment, classical formula is I=Irf+Lp+Rp
where:
Irf - risk free interest rate (like RBA rate)
Lp - liquidity premium - the harder and longer is to sell assets, the bigger Lp. For example for real estate it is bigger then for ASX stock
Rp - risk premium - premium for risk. For example it is close to 0 for government insured deposit in bank and much higher for emergent markets stocks
I would say that for small private business that discount rate should be not less than 20%
3. Discount your future income using interest rate you calculated and sum it.
Most tricky issue here is to project cash flow, that is pretty individual for every business.
If you have valuable assets (like real estate for example), often make sense to value them separately, many big company even pass assets ownership to special entity. The reason that with real estate as separate asset the I is lower than with small business in general, so if you use the same discount rate it will not be beneficial for you.
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